Both the ECB and the FED have surprised everyone by the incredible magnitude of their quantitative easing plans. Although the market’s initial reaction to the FMOC decision was bullish for 2 days, the S&P 500 fell 4 out of 5 days last week, as thoughtful investors pondered what such extreme monetary easing might mean for the economy and inflation. There is concern about possible unintended consequences.
Experienced operators know that stocks are still very overbought by historical standards. Most of the time, it is a losing strategy to buy after a big price run up, after nearly everyone already has turned bullish.
Market action suggests that investors reduced their stock market risk exposure in cyclical stocks last week. Financial, Energy, Materials, and Industrial stock sectors fell between 2% and 3%. The Dow-Jones Transportation ETF (IYT, 87.68) fell 6%.
Gold and Silver prices both rose above their highs of the previous 7 months on 9/21/12.
Dow-Jones Transportation Average closed down below its lows of the previous 15-weeks on 9/21/12, thereby demonstrating non confirmation and bearish divergence compared to the Dow-Jones Industrial Average.
The Largest Cap S&P 100/S&P 500 Relative Strength Ratio (OEF/SPY) rose above its highs of the previous 33-months on 9/21/12, thereby confirming its preexisting bullish major trend. Large Caps tend to outperform in bearish general market trends as investors seek the perceived relative safety of large size.
Industrial stock sector Relative Strength Ratio (XLI/SPY) broke down below its lows of the previous 2-years on 9/21/12, thereby confirming its preexisting major downtrend.
Utilities stock sector (XLU) absolute price broke below 15-week lows on 9/21/12 and remains bearish.
The S&P 500 (SPX: 1,460.15) fell 0.11 points or 0.01% on Friday and closed 0.38% lower for the week as a whole.
RSI(14) for the SPX declined slightly. Still, RSI remains in the overbought zone that has marked previous stock market highs. Now at 69.91, RSI(14) is nearly 2 standard deviations above its 20-year average.
On-Balance Volume for the SPX remains below its highs for the year, 2012, thereby demonstrating relative weakness and bearish divergence.
NYSE volume rose 41% to a level 28% above its 200-day SMA on Friday, reflecting position adjustments related to expiration of options and futures. Average volume has been trending down for more than 6 years, since 6/30/2006, and fell further in September, 2012, reflecting diminishing enthusiasm for stocks. NYSE Volume 50-day SMA and 200-day SMA both fell to their lowest levels in 13 years last week, on Tuesday 9/11/12, and both are still trending downward.
NYSE Cumulative Volume of Advancing Stocks minus Volume of Declining Stocks turned down from a level below its March high, thereby demonstrating relative weakness and bearish divergence. Clearly, volume has not been confirming the price up move.
It takes volume to push prices up. After the shorts have been forced to cover and the longs have had their fill of buying, in the absence of a fresh source of demand, stocks fall of their own weight.
While the S&P 500 Composite Price Index rose to a new 4-year high on 9/14/12, both the percentage of these same 500 stocks that are above their 200-day SMAs (now at 77.00, down from 81.80 a week ago, and down from a peak above 85 in March) and the percentage in bullish Point-and-Figure Chart uptrends (now at 79.40, down from a peak above 85 in February) failed to confirm that higher high. Both market breadth indicators still are diverging bearishly compared to the S&P 500 Composite Stock Price Index.
Investor sentiment data still indicates alarming degrees of optimism and bullish complacency. The pendulum of emotion tends to swing too far in one direction, but market mood always reverts to the mean, as it did during the -10% April-June 2012 downside price correction for the stock market.
The technical condition of the stock market does not support the excessive optimism of the bullish majority of stock investors and traders. Fed and ECB plans to buy bonds in unlimited quantities (with fiat currencies printed out of thin air and backed by nothing but a theory and a hope) do not guarantee that stock prices will continue to rise, especially now that the news is out. Typically, action is followed by reaction, and so a downside correction seems overdue. Choosing safety over risk still appears to be the most reasonable approach for conservative traders and investors.
The world is still a risky place. We are always analyzing the potential rewards and comparing them to the potential risks. We want to be able to estimate potential upside reward substantially greater than potential downside risk before we enter a trade. Potentials are constantly changing, but we always strive to keep the probabilities on our side. Sometimes, the best strategy is to be patient, preserve capital, and wait until a high-probability, favorable reward/risk opportunity develops.
*For extensive coverage of major global markets with illustrative charts, take a free trial for my weekly report —
click here.
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Hedge funds and equity mutual funds both lost money last year, 2011, and some are down again this year as well.
Meanwhile, one money manager made gains for 5 consecutive quarters; see:
Robert W. Colby Asset Management, Inc. (click here).
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The S&P 500 Composite Potential Resistance
1576.09, high of 10/11/2007
1552.76, high of 10/31/2007
1523.57, high of 12/11/2007
1498.85, high of 12/26/2007
The S&P 500 Composite Potential Support
1440.24, high of 5/19/2008
1439.15, high of 9/12/2012
1428.98, low of 9/10/2012
1426.68, high of 8/21/2012
1422.38, high of 4/2/2012
1418.71, high of 8/17/2012
1415.32, high of 5/1/2012
1404.16, 50-day SMA
1396.56, low of 9/4/2012
1391.04, low of 8/6/2012
1389.07, Fibonacci 78.6% of April-June 2012 range
1388.71, low of 5/3/2012
1381.50, Fibonacci 78.6% of 2007-2009 range
1380.39, high of 7/19/2012
1374.81, high of 7/3/2012
1370.58, high of 5/2/2011
1363.49, high of 6/19/2012
1362.93, Fibonacci 61.8% of April-June 2012 range
1357.38, low of 4/10/2012
1355.70, low of 7/2/2012
1354.00, 200-day SMA
1344.56, Fibonacci 50% of April-June 2012 range
1340.34, Fibonacci 23.6% of 2011-12 range
1340.03, low of 3/6/2012
1335.52, high of 6/11/2012
1334.93, high of 5/31/2012
1329.24, low of 7/24/2012
1329.05, high of 6/7/2012
1328.49, high of 5/22/2012
1326.19, Fibonacci 38.2% of April-June 2012 range
1325.41, low of 7/12/2012
1306.62, low of 6/12/2012
1303.47, Fibonacci 23.6% of April-June 2012 range
1291.98, low of 5/18/2012
1289.59, Fibonacci 38.2% of 2011-12 range
1266.74, low of 6/4/2012
1265.26, low of 1/5/2012
1262.30, low of 12/27/2011
1257.58, Fibonacci 61.8% of 2011 range
1248.58, Fibonacci 50.0% of 2011-12 range
1244.80, low of 12/7/2011
1239.73, low of 12/1/2011
1238.81, Fibonacci 78.6% of 1,576.09 high
1234.81, low of 11/3/2011
1231.04, high of 12/16/2011
1228.74, Fibonacci 61.8% of 2007-2009 range
1226.64, low of 11/9/2011
1224.57, high of 12/19/2011
1215.20, low of 12/16/2011
1207.56, Fibonacci 61.8% of 2011-12 range
1202.37, low of 12/19/2011
1158.66, low of 11/25/2011
1121.44, Fibonacci 50% of 2007-2009 range
1074.77, low of 10/4/2011
1149.16, Fibonacci 78.6% R of 2011-12 range
1014.14, Fibonacci 38.2% of 2007-2009 range
1010.91, low of 7/1/2010
991.97, low of 9/2/2009
978.51, low of 8/17/2009
956.23, high of 6/11/2009
881.38, Fibonacci 23.6% of 2007-2009 range
869.32, low of 7/8/2009
666.79, intraday low of 3/6/2009
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Tangible Assets, Commodities
U.S. dollar ETF (UUP) fell below its lows of the previous 10 months on 9/14/12. UUP closed below its 50-day SMA on 8/3/12, turning systematically neutral. UUP fell below its 200-day SMA on 8/31/12. UUP’s 50-day SMA has remained above its 200-day SMA every day since 10/26/11. The 50-200 spread is narrowing, however, and the SMAs could cross bearishly in weeks ahead. Support 21.57, 21.07, and 20.84. Resistance 21.85, 22.36, 22.45, 23.14, 23.52, 25.84, 27.19, 28.97.
CRB Commodity Price Index turned systematically bullish on 9/13/12 when its 50-day SMA crossed above its 200-day SMA. CRB remains above its 50-day SMA and 200-day SMA.
Agriculture, PowerShares DB Agriculture Fund ETF (DBA)turned systematically neutral suddenly on 9/17/12 when price crossed below its 50-day SMA. DBA remains above its 200-day SMA, and its 50-day SMA remains above its 200-day SMA.
Crude Oil, United States Oil ETF (USO) turned systematically bearish on 9/19/12, when price suddenly and sharply fell below its 50-day SMA. USO fell below its 200-day SMA on 9/17/12. USO’s 50-day SMA remains below its 200-day SMA, although that 50-200 spread has been narrowed since 8/3/12. Support 32.45, 31.40, 29.02, 26.28, and 22.74. Resistance 37.17, 38.31, 40.29, 41.38, 42.30, and 45.60.
Gold, SPDR Gold Shares ETF (GLD) turned systematically bullish on 9/20/12, when its 50-day SMA rose above its 200-day SMA. GLD price rose above its highs of the previous 7 months on 9/21/12, rose above its 200-day SMA on 8/22/12, and rose above its 50-day SMA on 8/3/12. Support: 170.06, 166.30, 159.56, 154.83, 148.27, 147.19, 143.97, 143.42, and 142.55. Resistance: 174.00, 175.46, 177.40, and 185.85.
Gold Mining Stocks ETF/Gold Shares ETF Relative Strength Ratio (GDX/GLD) rose above its 50-day SMA on 8/16/12, thereby turning systematically neutral. GDX/GLD rose above its 200-day SMA on 9/13/12 . The GDX/GLD 50-day SMA has remained below its 200-day SMA every day since 2/22/11, although that 50-200 spread is beginning to narrow.
Silver, iShares Silver Trust ETF (SLV) price rose above its highs of the previous 7 months on 9/21/12. SLV price rose above its 50-day SMA on 8/3/12, thereby turning systematically neutral. SLV price rose above its 200-day SMA on 8/31/12. The price 50-day SMA has remained below its 200-day SMA every day since 10/27/11, but the 50-200 SMA spread is narrowing, and a bullish crossover appears probable in days ahead. Support 32.77, 31.46, 29.28, 26.87, 26.13, 25.34, 25.00, 24.44, 22.52, 20.73, and 19.44. Resistance: 36.44, 40.23, 41.49, 42.30, 42.78, 44.71, and 48.35.
Silver/Gold ETFs Ratio (SLV/GLD) rose above its 50-day SMA on 8/16/12, thereby turning systematically neutral. SLV/GLD rose above its 200-day SMA on 8/31/12. SLV/GLD remains systematically neutral because its 50-day SMA has stayed below its 200-day SMA every day since 8/30/11. The 50-200 SMA spread has been narrowing since 8/22/12, however, and a bullish crossover seems possible in weeks ahead if the SLV/GLD ratio remains strong.
Copper, iPath DJ-UBS Copper TR Sub-Index ETN (JJC)price rose above its highs of the previous 4 months on 9/14/12. JJC rose above its 50-day SMA on 8/21/12, thereby turning systematically neutral. Price rose above its 200-day SMA on 9/7/12. JJC remains systematically neutral because its 50-day SMA has remained below its 200-day SMA every day since 5/31/12. The 50-200 SMA spread has begun to narrow over the past few weeks, however. Given that “Dr. Copper” is one of the better indicators of investor confidence (or lack thereof) in the global industrial economy, this strengthening from bearish to neutral may be suggesting less pessimism about prospects going forward.
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Spotlight on event stocks: Here is a stock screen I designed to pick out potential event stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are later revealed to be deal stocks or are the subject of some other extraordinary events, positive or negative.
Bullish Stocks: Rising Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
16.40% , KBH , KB HOME
4.26% , RSH , RADIOSHACK
3.82% , PIN , India PS, PIN
4.68% , RIG , TRANSOCEAN
3.26% , LBTYA , Liberty Global Inc. (LBTYA)
3.98% , MSI , Motorola Solutions, MSI
3.39% , AN , AUTONATION
2.26% , UNH , UNITEDHEALTH GRP
0.77% , PXE , Energy Exploration & Prod, PXE
2.11% , SVU , SUPERVALU
2.07% , WPO , Washington Post
4.82% , MTG , MGIC INVESTMENT
3.43% , EPI , India Earnings WTree, EPI
1.70% , ININ , Interactive Intelligence ININ
1.62% , OMX , OFFICEMAX INC., OMX
4.55% , DRI , DARDEN REST
3.27% , CBS , CBS CORP.
0.85% , ECL , ECOLAB
0.93% , SYK , STRYKER
1.54% , ESRX , EXPRESS SCRIPTS
0.32% , EZU , EMU Europe Index, EZU
2.11% , NTAP , NETWK APPLIANCE
0.39% , PEJ , Leisure & Entertainment, PEJ
0.49% , PXN , Nanotech Lux, PXN
1.53% , ODP , OFFICE DEPOT
0.77% , IWC , Microcap Russell, IWC
2.33% , IP , INTL PAPER
0.87% , CVG , CONVERGYS
0.96% , FRX , FOREST LABS STK A
2.49% , LEN , Lennar Corp. (LEN)
0.24% , IDU , Utilities DJ, IDU
2.52% , SWK , Stanley Black & Decker
0.99% , COL , ROCKWELL COLLINS
Bearish Stocks: Falling Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
-9.32% , CTB , COOPER TIRE
-0.42% , PFM , Dividend Achievers PS, PFM
-6.52% , RIMM , RESEARCH IN MOTION LTD
-4.86% , GT , GOODYEAR TIRE
-1.81% , MDP , MEREDITH
-1.77% , TLAB , TELLABS
-1.58% , KO , COCA COLA
-0.92% , EWD , Sweden Index, EWD
-0.79% , PPA , Aerospace & Defense, PPA
-2.01% , DOW , DOW CHEMICAL
-1.82% , JBL , JABIL CIRCUIT
-4.05% , COH , COACH
-1.01% , UPS , UNITED PARCEL STK B
-1.38% , PFG , PRINCIPAL FINL
-0.61% , FAST , Fastenal Company
-0.20% , RFG , Growth MidCap S&P 400, RFG
-1.22% , EBAY , EBAY
-0.84% , SIAL , SIGMA ALDRICH
-1.16% , PMTC.O , PARAMETRIC
-2.01% , SWY , SAFEWAY
-2.05% , AM , AMER GREETINGS STK A
-1.31% , CTAS , CINTAS
-2.02% , LSI , LSI LOGIC
-0.40% , MMM , 3M
-0.65% , WFC , WELLS FARGO
-1.17% , SJM , J. M. Smucker
-1.28% , AMZN , Amazoncom Inc
-0.58% , RPV , Value S&P 500, RPV
-0.20% , ADRD , Developed 100 BLDRS, ADRD
-0.28% , PST , 200% Short Bond 7-10 Yr T, PST
-1.12% , LUV , SOUTHWEST AIRLS
-0.75% , INTU , INTUIT
-0.50% , SNPS , Synopsys Inc
