This past week the Dow Jones Industrial average lost 55 points on the week while the S&P 500 lost 7.68 points, both, very minor losses. Does this suggest a real turn in the stock market?
Many pundits are suggesting a turn and are touting the drop in the headline Unemployment Rate to 9.7% from 10% in December. We say it was a statistical anomaly and believe the Unemployment Rate is headed towards 11%.
There really can only be two reasons for this drop. Either there really were more jobs created or there was some bias in the survey sample. We opt for the bias in the survey sample. In any event, to have a real meaningful economic recovery we will need to see serious job growth especially in the Private Sector. We continue to ask though, where is the job growth? The numbers might be improving but we are not there yet. Looking at the Non-Farm Payrolls report this past Friday as we shall see, once again, we lost 20K jobs vs. consensus estimates for a +15K and December was revised to reflect -150K jobs lost from the initially reported -85K. Also, on Friday we saw January Average Weekly Hours come in at 33.3 vs. 33.2 consensus and January Average Hourly Earnings were +0.3 Month over Month vs. the 0.2 consensus, both slightly better numbers.
We have said for a long time - regardless of the economy and the economic news one must really focus on the technicals of the stock market. Remember one thing, the stock market is a discounting mechanism. Do you see where we have come from in the past 10 months on the Dow Jones Industrial Average? Let me remind you, 6469.95 to 10,729.89, Friday’s close 10,012.23. I would say we have the stock market priced for a perfect recovery, one which we do not have nor can really develop based on the systemic issues that were created from this global collapse that occurred.
As outlined in our last report, we still believe the following issues will hold the stock market hostage to a great degree. We also believe that we will not see any real meaningful move to higher prices (above 1150 S&P 500 or 10,729 Dow Jones Industrial Average) for a minimum of 6-12 months:
1. Earnings: “sell the good news” mentality will continue to exist for the remainder of this earnings period, 2. China: wants to slow their growth due to worries about a bubble developing, 3. President Obama's administration: policies to be or not to be; far too much uncertainty and belief they are going in the wrong direction, 4. Sovereign debt crises?: while we don’t believe Greece, Portugal or Spain will bring down the world economies the way that USA subprime did, we do believe there can be plenty of ripple effects and how many more shoes will there be to drop? 5. US Economy: will we see real growth once the government programs have expired?
We do not believe Armageddon is here but do think one should be very nimble in their “investment” selections and trade the stock market according to technicals as opposed to fundamentals. Do not let yourself become a victim to good economic data when it does come out and believe the stock has to soar or even rally. As mentioned last week, we wish to remind you that back in 2001 the United States experienced a fairly shallow recession - it was declared to be over in November of 2001. From November of 2001 until March of 2002 the stock market rallied (4 months) and than declined for the following 7 months before bottoming out. The highs that were seen in March 2002 were not seen again until January 2004 - nearly 2 years later. One has to remember that was a fairly shallow recession, what we just experienced in 2008-2009, was the 'real deal' nearing a depression all over the world. Yet the rebound in the stock market does not appear to reflect the severity of the situation from 2008-9.
We think a reprieve for the short-term might be at hand but the sell the rally mentality will exist for some time. We are still of the belief in 2010, we see a 10-15% correction.
Our Short Term Market Thoughts:
We think one should allow for some sort of rally at a minimum back to resistance around S&P 1075-1080. At that point we will assess the tape action is to see if we should allow for further upside before putting on a short position. Ultimately, at some point, whether directly in front of us or down the road in 2010; we feel there is still unfinished business on the downside. A 10% correction from the highs is our bare minimum expectation and that would take us to 1035, while a 15% correction takes us to around 977. The 977 in interesting in that a .38 Fibonacci retracement from the March 2009 lows of 666.79 to the January highs of 1150.45 gives us 965 on the S&P. This ties in rather nicely with our 15% correction and we certainly would not rule this out at some point.
S&P Cash support levels of interest: 1058/1059, 1054/1055, 1043/1046, 1034/1036, 1030 200 day EMA
S&P Cash resistance levels of interest: 1071/1073, 1080/1082, 1089/1090, 1098/1100, 1103/1105
Regardless of how you play the market, at ProfessionalStockTraderLive we always preach for you to use patience, discipline and stops.
Since late November 2009, we have been teaching our members in our nightly video update to be vigilant for this impending change in market sentiment. It certainly would appear we saw some sort of a reversal day on Friday, January 5 so we must be on the lookout for some further rally efforts. We did see some very oversold intraday readings as well as some positive divergences that we identified and actually were looking for some sort of reversal back to the upside to occur. If this rally continues into resistance and we see the necessary reasons to short; at that point we will be teaching our members how to consider going short with a stop which will limit our risk. The real time trading setting allows many to learn how to day trade at this interesting juncture in the markets. Currently, many of our members are coming into our real time trading environment and asking us to show them how to still day trade and profit, if indeed we are in a transition from a bull to bear market. Regardless of how you play the market, we always preach for our members to use patience, discipline and stops.
