Saturday, April 19, 2014

The Week Ahead: A Spring Breakout for the Economy?

Just a week ago the stock market was looking quite vulnerable as most of the major averages closed near their lows last Friday, April 11. There were signs of heavy selling, so I concluded last week that "On a short-term basis, the market is getting oversold, so we should see a bounce this week. Unless it is quite strong, it will likely be an opportunity to become more defensive and raise some cash."

The higher close last Monday signaled the rebound was indeed underway and made Wednesday's action pivotal as a sharply lower close would have signaled that the rebound was over and that investors should prepare for a further decline.

Instead, Janet Yellen's clarifying comments at the Economic Club of New York seemed to calm the markets and bring in more buyers. She made it clear that the Fed would keep rates low as long as needed to be sure the recovery stayed on track.

She also seemed more worried about deflation than inflation as she said "inflation persistently below 2% could pose risks to economic performance." The Fed continues to think that the recent soft data is due in part to the very hard winter.

This has been dismissed by many analysts early, but I continue to think much of the weakness is weather related. This was the spring thaw I discussed in February. The concern that a weaker economy would not support the lofty stock prices was one of the reasons many bailed out of stocks, especially those with suspect earnings.

So far, the earnings season has not been as bad as many feared. To be sure, there have been some big misses but also some results that were much better than expected. This earnings season may end up as a positive for the markets.

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The S&P 500 closed higher each day last week and gained 2.7%, which was its best weekly performance since last July. The Nasdaq Composite was up 2.4% as the hemorrhaging in the tech and biotech stocks seems to be over. The sharp decline in these sectors and small-cap stocks is now looking more like sector rotation.

The % change chart of some of the consumer Internet stocks illustrated the wild swings, so far, in 2014. For example on March 4, Yelp Inc. (YELP) was up over 46% for the year, but as of last Thursday's close, it is now down 4.5%. Facebook Inc. (FB) has done a bit better as it peaked a few days after YELP and was up close to 32%. It is still positive for the year but now shows just a 7% gain.

Twitter, Inc. (TWTR) has spent very little time in positive territory this year, and even though it has bounced recently, it is still down over 33% for the year. In comparison, the PowerShares QQQ Trust (QQQ) looks relatively stable as after being up almost 5% in March it is now down 0.8%.

The weekly chart of the PowerShares QQQ Trust (QQQ) shows that the decline has not yet reached the 38.2% Fibonacci support at $82.57. Therefore, there is no evidence of a change in the major trend. The weekly OBV did drop below its WMA and violated the uptrend from the September lows, line a. It has held well above the long-term support at line b and turned up last week.

Most of the major global markets have had a rough time, so far, in 2014 with the German Dax down 1.5%, the Hang Seng Index dropping 2.5%, and Japan's NK225 even worse as it is down 10.9%. This poor performance, combined with the publicity blitz over Michael Lewis' new book, has given many investors a reason not to buy stocks. I think that the misguided emphasis of the financial media, which I pointed out a few weeks ago, did a disservice to the investing public.

According the AAII, the percentage of bullish investors is now down to 27.2% after reaching 55% at the end of 2013. This reflects the increasing fear of or distrust of the stock market by many investors. Though this is bullish for stocks, it may keep the public out of the market until it is much higher.

Though there are still concerns over the situation in the Ukraine and the health of China's economy, I see signs of continued improvement in the global economy. It was just two years ago that many analysts were predicting that Greece would drop out of the European Union and that it might totally fall apart.

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That is why I found this chart of Greek bond yields quite amazing as yields started to rise in 2011 when their economic plight worsened. In March 2012, the yield rose to over 30% after new austerity measures were passed and there were riots in Athens. Now the yield is below 6% and back to the levels seen in early 2010. Though the weaker Eurozone countries still have problems, they are getting better, which suggests to me that the Eurozone is on the mend.

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