Stocks Have Done Little To Address Concerns

Editor’s Note: Developments after hours may be relevant for Wednesday’s session. It is important we keep an open mind and remain highly flexible over the next few trading sessions (FED Wednesday). The market will guide us if we are willing to listen. From MarketWatch:

Turkey’s central bank Tuesday aggressively increased overnight lending rate/interest rates to shore up the lira at an extraordinary policy meeting billed as a test case for under-pressure emerging markets.

Economy Has To Step Up

Many elements are in place for stocks to perform well over the coming months, but investors are still waiting for a more convincing run of economic data. Monday’s housing figures were disappointing. Tuesday brought a mixed bag for investors. From Reuters:

Durable goods orders dropped 4.3 percent in December, weighed down by weak demand for transportation equipment, primary metals, fabricated metal products, computers and electronic products and capital goods. The economy, however, has not completely lost its luster. Consumer confidence hit a five-month high in January and house prices posted their biggest year-on-year gain in almost eight years in November, other reports showed on Tuesday.

Bearish Pattern Could Be Forming

If you follow our work, you know we are not big fans of forecasting. However, it is prudent to understand possible scenarios from a contingency planning perspective. The green box in the chart of the S&P 500 below shows what has actually happened as of January 28. The orange box shows the basic look of a bearish head-and-shoulders pattern that could be forming. Many of the elements, from investor sentiment and momentum perspectives, are in place that could fuel the widely used, and potentially bearish pattern. The right shoulder still needs to form for the relevance to pick up.

The pattern above has a chance to develop as long as the S&P remains below 1,848 and above 1,775; any violation of those levels on a closing basis would take the potentially bearish set-up off the table.

Emerging Markets – Why They Matter

Emerging market stocks (EEM) have been getting hit harder with the pullback-stick in 2014. The importance of their economies to the bigger global picture has increased significantly in recent years, meaning it is something we are keeping an eye on. From Bloomberg:

The threats posed by developing nations are attracting debate, given these countries now account for almost 40 percent of the world’s gross domestic product, up from 18 percent two decades ago. They also served as the world economy’s engine when the West was reeling from the financial crisis of 2008 and subsequent recession and European debt woes. “A broader emerging-market crisis today would come with much greater ramifications” for growth worldwide, said Michala Marcussen, global head of economics in London at Societe Generale SA.

Investment Implications – Stocks Down Monday, Up Tuesday

Since the S&P 500 was up 10 points at 3:00 p.m. EST Tuesday, you might surmise “the charts must be improving”. However, the weekly tally still sits at a paltry gain of 2 S&P 500 points. Given not much has changed since last Friday’s close, the concerns outlined in last weekend’s video still apply heading into Wednesday’s Fed announcement. An example of a concerning look that still remains in place Tuesday is the weekly chart of the S&P 500 ETF below (SPY).

Our market model reduced risk last week to align with the market’s deteriorating risk-reward profile. We continue to hold a mix of cash, bonds (TLT), and stocks, such as SPY and technology (QQQ). With the Fed on deck, we will enter Wednesday’s session with both bullish and bearish migration plans.

This entry was posted on Tuesday, January 28th, 2014 at 4:27 pm and is filed under Stocks - U.S.. You can foll