Here is the preview of the coming week on the S&P 500 from Traverse City, Michigan.
The S&P 500 slid lower in all four trading days this past week, shedding 1.94%. The index has closed lower in each of the last five sessions and has dropped 2.86% over the span.
The absence of legislation to avert the fiscal cliff weighed heavily on the stock market this past week; however volume was very light during the stretch, averaging less than two thirds of the 13 DMA over the past four trading days.
There has been a large spike higher on the S&P 500 Volatility Index (VIX) as it finished Friday at 21.79, the highest close seen on the index since it dropped abruptly from the 24.27 close on June 13, 2012. The large increase in the VIX is reflective of the largest five day fall in the index since the 3.77% drop that finished on Nov 13, 2012, two days before the Nov 15 low.
Major Market Indexes
Most of the five major stock market indexes, the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000, began to show some bearish tendencies in the past week. Although they are not yet trend setting, these bearish tendencies should be watched to see how they might develop from here.
The DJIA, S&P 500, NASDAQ, and NYSE have all slipped to a low lower than the previous cycle’s low, while the Russell 2000 has so far held above this level. A failure to set a higher high in the next rebound could send some traders for the exits. Although it would not necessarily mean a downtrend is developing, many could fall to the sidelines and sit it out while waiting for a more bullish stance in the charts.
At the same time, if the indexes were to push to a higher high in the rebound, most would considered it a confirmation move that the stock market is likely to continue higher for some time to come. It doesn’t necessarily mean there won’t still be some bumps ahead, only that the overall trend will likely continue higher.
Several of the indexes are also showing a possible bearish dip in the 13 EMA. The 13 EMA is nearing a bearish cross below the 50 EMA on the NASDAQ, DJIA, and S&P500. However, this dip to, near or even below the 50 EMA by the 13 EMA after the initial break above it is not uncommon and the stock market most often rebounds from this drop. Although not always the case, a drop like this is most often a good buy signal.
Although many traders remained away from their desks taking a well-deserved extended holiday break, which could explain some of the recent low volume, the low volume into the selloff could also indicate many investors have taken a wait and see stance. Many have pointed out there aren’t a lot of buyers, but the low volume would point out there aren’t a lot of sellers either.
Much of the economic data continued to show strength in the past week, although the uncertainty of what might befall from the fiscal cliff has taken a toll on consumer confidence.
The indexes and many stocks have become quite oversold. It doesn’t seem unlikely that stocks could rebound in the week ahead. Any hint that legislation will be passed in the near future to address the fiscal cliff could set a rebound in motion. It is not unlikely the initial rebound could be much steeper than the fall and it seems possible the fall seen during the past five or so trading days could be recouped in a session or two.
S&P500 Constituent Charts
Many of the constituent charts are showing a toppish curl in their current runs, making them appear somewhat bearish. Although the charts might appear somewhat bearish, there are reasons to think of this as more of a bullish round of profit taking, than a bearish turn lower.
Not all of the constituents are showing these curls lower, many have continued higher or held within a fairly narrow uptrend higher. Others that are showing this curl have held within support levels of the current uptrend or have fallen to or near support levels in longer term uptrends.
Many of the constituent stock prices have fallen quite far on volumes that are uncommonly low. It makes the depths of these drops look out of place as there was little volume to back the fall. Some might point out that this is due to a lack of capitulation, or that there were many traders on an extended holiday, but it could also be a lack of conviction on the part of sellers.
Sellers here are probably still largely made up of those taking profits for tax reasons and the lack of volume caused this profit taking to exaggerate the drop in stock prices, much like the seven day period after the elections. If this appearance is correct, this profit taking could end abruptly after Monday. The drop in stock prices has brought many stocks to appealing prices, that are oversold at or near support levels and those selling for tax purposes, could easily change to buyers.
Not all constituents fell during the week, several continued or started higher. I heard many of these run ups referred to as ‘Window Dressing” caused by mutual funds looking to buy positions in stocks that have run up largely for the year to give the appearance they have been in many stocks that are running higher. This is probably true to some degree, but these run ups were not entirely in stocks that were up for the year. Many were well below their 52 week highs, and some rebounded strongly at support levels found at or near 52 week lows.
Also many of these stocks that ran higher from or near 52 week highs have good reasons to continue higher and are still far below historical highs. Window dressing does not work well if these stocks tank largely early in the year, so although these funds might have been trying to spruce up their portfolios, they appeared to be buying into those stocks with good reasons to continue higher in their runs.
Although many of the constituents have fallen to deeply oversold levels, many are still maintaining at or near overbought levels, and this is a bullish indication.
Although some of the constituent stocks that saw prices run up might have been window dressing, overall these run ups give the appearance that the early rounds of value buying have begun. The depth of the fall has taken many to likely support levels, and many are deeply oversold. It makes a rebound in constituent stock prices look likely.
I completed the December earnings update last week and hope to publish the full report soon. It shows that most that already reported are beating the current and beginning of the quarter earnings estimates soundly. Over the past several quarters the early reports have been soft. There was considerable firming of these reports this quarter, and this bodes well for a strong earnings quarter.
Although the charts have taken a somewhat bearish appearance, it was on very low volume. The stock market could rebound on just as low of volume, but if the rebound sees increased volume, it could rebound much more steeply than it fell. Most indicators continue to be bullish. Most economic and earnings data continues to be very bullish. If investors can look past the fiscal cliff issue, or the fiscal cliff is resolved, stocks look to have large upside potential.
The +90 day, -2% H, +2% H, 90E and +10D indicators are currently active. See a more detailed description of the indicators I have developed through my research here.
The -2% L (precautionary) indicator did not provide a correct indication in the past week. Although it still seems unlikely a drop of 2% or greater in a single trading day will occur, the failure of our legislators to come to an agreement could cause a selloff of these proportions, therefore I have temporarily set this indicator to a high rating.
The +2% indicator is also temporarily set to a high rating due to the large selloff in the previous week setting up the possibility of a strong rebound if legislators reach an agreement on the fiscal cliff.
The +90 day indicator will expire on Dec 31, 2012. The indicator will likely expire nearly flat in this appearance and has performed as follows in the format: highest close / lowest close / last close.
+3.36% / -4.57% / -1.11%
The +90 day indicator weakened during the past week.
The ten day indicator toggled high into Friday’s drop. The +10D indicator shows periods with a heightened chance that the S&P 500 will increase by 3% or more within the following 10 trading days. When this indicator fails to toggle cleanly off, it also tends to fail to perform as expected. Although I cannot find anything in the data to provide indication that this indicator will or will not toggle off cleanly, it appears news at the time this indicator toggled high could have been the culprit in past failures. Therefore it seems possible the current uncertainties over the fiscal cliff negotiations could cause a continued selloff and hold this indicator in high state. At the same time news of an agreement could push stocks higher.
A 90E indicator is currently active. Although this indicator was present during bearish periods during most of my past articles, and the charts currently appear to be leaning slightly towards the bearish side, indicators continue to point to a bullish run in this instance. As is always the case, news or current events could change the expected outcome and the failure of legislators to come to an agreement on the fiscal cliff have already caused a fairly large pullback.
Although the fiscal cliff continues to be the lead story, most of the constituents are reporting fourth quarter earnings above expectations and much of the economic reports are also doing better than expected.
A +10D indicator has toggled high. Although this indicator has failed in the past, it generally reaches a high state near a bullish push higher. Even when it has failed, it was close to rebound points, and has seen rebounds within the expected range at some point afterwards, although they fell outside the ten trading day window this indicator was designed for.
Many of these sources of information were used in this article.
Have a great day trading,
Disclosure: I am currently about 95% invested long in stocks in my trading accounts. I am also short 20 year US Treasuries. The increase in my investment level was due to the purchase of two issues that were partially offset by the proceeds from the sale of one issue and dividend payments. I continue to plan to offset sales with purchases relatively quickly and continue to look at new issues to expand my portfolio. All buy orders I opened in the past week or two will expire on Dec 31, at that time I may reopen some, or I may decide to hold at about my current investment level.
I will receive dividend payments from 25 issues in the coming week and 5 in the following week, provided I missed no issues that will pay early for tax purposes. Although these dividend payments would normally reduce my investment level, based on my current account balance and if I make no further investment changes during this timeframe, my investment level would remain unchanged due to the basis change at the beginning of the New Year. In order to keep a non-fluctuating basis during the year, I use the current cash balance and divide it by the previous year’s closing account balance to reflect the percentage I am invested.
Disclaimer: What I provide in the Stock Market Preview is my perception of the current conditions and what I think is the most probable outcome based on the current conditions, the data I have collected and the extensive research I have done into this data along with other variables. It is intended to provoke thought of the possible market direction in my readers, not foretell the future. I do not claim to know what the stock market will do. If the stock market performs as I expect, it only means I am applying the stock market history to the current conditions correctly. My perception of the data is not always correct.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.