Spring Forward Fall Back

SPX – 1138.50

DJIA – 10,552

“The disparity between hope on Wall Street and malaise on Main Street continues. I have never seen anything like it. Perhaps it is dangerous to draw a conclusion, but for now I think it is consistent with a neutral to mildly bullish trading strategy.”

-Ned Davis

“Given the conflict between short and intermediate indicators, it looks as if the [stock] market will rally for the next few weeks, and then experience a more significant correction. We are no longer recommending any bond positions because our bond barometer has gone bearish.”

-Martin J. Pring

“One of the most powerful bull markets of all time hits its first anniversary this week, and individual investors hate U.S. stocks almost as much as they did when the market was tumbling to a 12-year low last March,” summed up Tom Lauricella in The Wall Street Journal ABREAST OF THE MARKET column yesterday. Investment Company Institute data shows $4.6 billion removed from U.S. stock mutual funds so far this year, most likely the cold feet a consequence of burned fingers as the median age of 76 million retirement-bound baby boomers pushes 53.

The rally from the February 5 low was persistent but until last Friday’s 90%-up day, it seemed minimal selling was more of a factor than strong buying. According to DecisionPoint.com, the percentage of SPX stocks participating in declines was 10% or less for the last six trading days while advances led declines each day during that streak and for 16 of the last 19 trading days.

The thesis that the SPX may have put in a cyclical bull market high on January 19 at 1150.44 is hanging by a hair’s breadth. I was looking for a reversal last week but it seems as though the rally could carry to new recovery highs into spring before correcting. From the lead quotes I pulled out of Barron’s this week, that seems to be the scenario Ned Davis and Martin Pring are anticipating.

So is Martin Barnes, the Managing Editor of The Bank Credit Analyst who spoke before the CFA Society of San Francisco yesterday. A savvy Scottish-born analyst who had the sense to settle in Victoria, BC, Canada, Mr. Pring laid out the case for a subpar but sustainable recovery with moderate growth and low inflation. While it’s early enough in the cycle for earnings to continue improving, headwinds include too much debt, too little savings, too many vacant properties and improving but still recession-level hiring plans. Pring asked, “If companies did over fire, why doesn’t hiring look better?”

Let’s hope Barnes is right. Given the stream of better economic data (After Jerky Swings, the Economy Begins to Look Nice and Boring read the headline in Floyd Norris’ column in last Friday in the New York Times) that’s a better outcome than a price and time overbalance indication by Mr. Market that it’s already discounted the best. Consumer spending is clearly better and perhaps it stays stronger than expected, driving SPX prices toward strategist targets about 1300.

If the stock market plays out in a positive manner, the count for price and time overbalance from the next intermediate-term high shifts to the higher hurdle rate set on the January-February decline. Under this scenario, stock prices could have a deeper overall decline followed by yet another section up. Last week’s letter was headlined Nearing the Moment of Truth and I suspect today might be the last day in that window. By my count, the SPX is near its last grasp on the hourly chart. Stay on your toes; it’s negative if the SPX reverses under the January 19 high and it would certainly surprise a lot of smart people. History repeats itself in the stock market but never exactly.

Tactically, the plan is to stay long ETFs tied to the SPX and stronger Nasdaq 100 (NDX) until the uptrend reverses. The Russell 2000 (RUT) and S&P Small Cap 600 (SML) are leading the way and already trading on new recovery highs. I wish I had used small cap ETFs but that’s spilled milk.

The Market Trend Indicator (MTI) continues to signal UPTREND. It remains in an uptrend mode as long as each key index closes above its respective 18% weekly exponential moving average. The SPX’s 18% average is 1103.99 and the DJIA’s is 10,310. The New York Advance/Decline line is 9,552 net advances above its 18% average.

The peak NYSE net volume figure on the rally increased to +42.6. To confirm uptrend, it wasn’t necessary for net volume to better an earlier (69.6) hurdle rate, only the preceding peak from the prior short-term decline, (19.7). NASDAQ’s peak net volume on this short-term rally is +37.7 compared to (23.4) its last short-term decline. Both are in synch with the MTI and 21-day rule.

NYSE weekly net volume overbalanced last week with a +26.9 reading bettering the (24.3) peak figure recorded on the January decline. NASDAQ weekly net volume stayed in the uptrend mode during that decline, yet its peak on this rally is +19.1, the same as the (19.1) peak recorded on the January decline but the uptrend get the benefit of the doubt until proven otherwise.

Market ID (internal dynamics) is a proprietary indicator made up of eight technical factors, none of which is price but including advances and declines. Note how the ID is within spitting distance of its all-time high in July 2007. Volume held the ID reading back while the A/D line has been above its September 2007 high since late December, but just like the SPX, it’s close to confirming a more positive outcome.

As for group action, the best performing from the February 5 low include Consumer Electronics, Mortgage Finance, Automobiles, Gold Mining, Iron & Steel, Mining, Coal, Commercial Vehicles & Trucks, Automobiles & Parts and Basic Resources. Autos, Mortgage Finance, Consumer Electronics and Auto Parts are among the top ten groups as measured by relative strength. The other top ten relative strength include Airlines, Recreational Products, Recreational Services, Coal, Electronic Office Equipment and Retail Home Improvement. Interesting, the differential between the worst performing groups declined every week from the low, a negative indication for relative strength players.

In other markets, I would lower stop buy points on TLT shorts (a proxy for long-term government bonds) to few ticks above the February 5 highs (TLT-92.42). As for gold, Richard Russell wrote on March 4, “…One of these days  I expect to see gold bricks and gold coins on the cover of both Time magazine and Newsweek. Of course, that will probably mark the top of the great bull market.” I suspect he’s right with regard to general press coverage, so don’t marry positions as markets that go parabolic typically come down hard and fast once the top is in. For new positions, I would place trailing stop sell orders just below the February 5 low. For longer-held positions, I want to see more strength before raising my recommended stop level under last September’s low ($989.50 2^nd London fix).

California produces about 90% of he domestic wine consumed in the U.S. from approximately 2,843 wineries and 4,600 wine grape growers. Silicon Valley Bank expects up to ten wineries in Napa Valley to change owners this year and next in distressed sales or foreclosure. It banks 250 vintner clients in Napa. More than 30 wineries are up for sale in California, Oregon and Washington.

Harmonic Preview:

(High Probability SPX Turning Point or Acceleration Days)

March 4*             (Thursday)

March 9                (Tuesday)

March 15             (Monday)

March 24             (Wednesday)

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

Bloomberg reported that cash is 3.6% of equity mutual funds, down from 5.7% in January 2009 at the lowest level since the NYSE Advance/Decline line peaked in September 2007. The A/D line has been above that level this time around since December 2009 and it closed last week on a new all-time high.

I’m publishing  little late this morning because the electricity in Laurel Heights was off for nearly three hours this morning. Pacific Gas & Electric isn’t nearly the swiftest utility. For example, it’s spending nearly $2 billion to jury rig a “smart meter” system unlike Duke which took the trouble to research available technologies. Since I’m heading to Laguna Niguel next week for the Roth Conference, I’ll probably publish a day or two early next week.

Conclusion:

It’s positive for the market if the SPX can rally to a new recovery high and negative if it can’t. In bad markets, monthly highs generally occur early in the month while lows come later; that’s the nature of declines. I would keep stop sells at a point under the February 25 low (SPX-1086.02). When the trend reverses, I think the best short candidates will be ETFs tied to small cap indexes. Inverse ETFs include ProShares Short Russell 2000 (RWM) and for more leverage, ProShares UltraShort Russell 2000 (TWM). For investors, I would raise cash reserves when the MTI signals downtrend

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.