Is the Good News Priced In?

SPX – 1197.11

DJIA – 11,005

“One year into the current bull market I like what I see: globally improving fundamentals plus strong societal skepticism. Snarky, cranky sentiment and better fundamentals are the classic ingredients of the second phase of bull markets.”

-Ken Fisher

First quarter earnings season kicks off, positive comps and guidance virtually in the bag, traders circling like hawks to see how stocks react. Advance/Decline momentum peaked in mid-September, foreshadowing the improvement while broad technical strength since points to the likelihood of higher prices later this year.

Near-term, the rally may be on tepid volume but it’s persistent and remains intact. The daily swing chart pattern discussed last week signals to be alert for a reversal and interim correction. Beneath the surface, last week’s CBOE call buying to put buying ratio was the highest since March 2009, trending up over the past two weeks while the smarter money OEX call/put ratio trended towards a greater percentage of put buying.

Reflecting minimal selling, net volume readings paint a better picture than total volume, with peak NYSE reading for the short-term rally improving to +53.3 last week from +42.6 while NASDAQ stayed at +44.5. Declines can end on peak readings but I’ve never seen an intermediate-term rally end on its peak short-term reading or primary advance end on its peak intermediate-term reading. That doesn’t come into play on the intermediate advance from the February low; the NYSE peak was registered on April 18 at +55.5.

The Market Trend Indicator (MTI) UPTREND reading stays in force. The SPX is well ahead of its 18% weekly exponential average, 1148.07 this week. Up nine weeks in a row from its February low, the New York Advance/Decline line is 8,963 net advances above its 18% average. The DJIA is the laggard of the three key indices but still comfortably above its 18% average of 10,661.

Small cap stocks continue to outperform large cap and the rebound continues for groups in economically-sensitive sectors. Gambling climbed into the top ten group list as measured by relative strength, joining Consumer Electronics, Hotels, Recreational Services and Recreational Products in the consumer discretionary category. In the financial sector, Life Insurance, Full Line Insurance, Mortgage Finance and Real Estate Holdings represent the financial sector and Steel holds out in the basic materials sector. I want to see how this leadership reacts to guidance and holds up on the next correction before declaring a momentum run is at hand, allowing managers with a relative strength bent to outperform versus the “buy low-sell high” mentality so prevalent for the past year.

In other markets, long-term government bonds rallied sharply last Wednesday with lots of short covering after the trendline break and there was some follow through buying yesterday. The massive size of looming bond auctions becomes a real problem at some point but as the Fed backs away from quantitative easing, PIMCO’s Mihir Worah ($18 billion Real Return Fund manager) explains, “There is a near-term risk of flipping to deflation given our view that developed economies have not fully healed and consumers are not yet ready to stand on their own two feet.” Tactically and using TLT (Barclays 20-yr.+ Treasury ETF) as a proxy, I would maintain stop buys on short positions at just above the March 18 high (91.98).

The U.S. Dollar index traded in an inside range over the past two weeks. A trade below its March 17 low (79.50) would indicate its rally is likely over. As for gold, I would raise stop positions for recent purchases to just under the March 25 low ($1093 2^nd London fix) from under the February 5 low ($1058). I’m not yet ready to raise stop levels on long held positions because I don’t expect a ten year bull market to end with a whimper; I think a highly speculative outbreak of “gold fever” lies ahead.

Harmonic Preview:

(High Probability SPX Turning Point or Acceleration Days)

April 16           (Friday)

April 28           (Wednesday)

May 3              (Monday)

*An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

The SPX is within a hair’s breadth of its July 2008 low (1200.44), a level it violated amid fierce selling in September 2008 after Lehman failed; it’s now resistance but likely to be penetrated. Harmonic divisions and potential resistance above that key level are 1207.43, 1228.74, 1235.10 and 1246.88.

Conclusion:

There’s no change in tactics and for intermediate-term speculators, I think it makes sense to keep trailing stop sell orders at tighter than normal levels. For ETFs tied to both the SPX and Nasdaq 100 (NDX), I recommend a stop sell levels 1% under the 20-day moving average or 1161.11 as of today for the SPX and 1939.26 for the NDX. When the trend reverses, and given the contrary nature of group rotation, I plan to short the strongest areas not the weakest; those would be ETFs tied to small cap indexes.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.