Just the Facts

There are times when all the headlines and pundits are in bull mode regardless of the facts. There are also times when it gooses ratings to go with all negatives all the time. Frankly I think we spend way too much time searching for what some real smart guy may think. Perhaps we would be better served to fine tune our ability to gauge what the market is telling us. So, compare what the data in the next few paragraphs throw your way with the drill. Try to wade through a sampling of the headlines I give below with tracking the LEI’s and the technical picture of the market. If we always start from a position of knowing what the LEI’s and overall technical picture of the market are we can leave the headlines to the guys that work for the newspapers. 

As investors wait to hear updates on a host of issues from Europe, the trading pattern remains the same: dips are being bought and the pain trade still seems like it’s higher. We will receive several potential market catalysts: minutes from G20 meetings, German Greece votes, LTRO updates, Ben Bernanke will speak on Wednesday, etc., all in this busy week. 

The Greece bailout is certainly not a done deal. The German parliament votes on the matter today. Since the Germans are going to be footing a large part of the bill I am sure the process will be contentious. The EU will end or curtail some of the effective steps they have taken in the LTRO process as February comes to an end. Domestically, WTI is up 9% year to date and prices at the pump have soared. If I know all of this then everyone knows. The response to all of the data that has come out over the past few months is to look at every dip as a chance to buy your favorite stocks. The market started off slowly today before buyers came in and took advantage of the dip to drive stocks into positive territory as I write.

Let’s follow the drill and take a look at the Leading Economic Indicators (LEI’s). So far all three of the leading indicator series that have reported February data have risen for the month. This week will see 7 different numbers in the LEI series released. As for your, or my, opinions on the whys and how of what is moving the LEI’s, the market does not care! When the series is falling the markets tend to go down. When the series bottoms and begins to move higher it is a good bet the market is moving higher. When the market and LEI’s are both moving higher it is the job of the bears to explain why the market is wrong. I try to stay out of that argument. I can’t make the market go higher. I can only attempt to read what the market is telling me and position myself accordingly. The LEI’s remain in fine shape.

Let’s look at the technical picture of the market. The longer term technical picture remains positive. That is primarily based on the percentage of stocks that are in basing or advancing patterns. 83% of the stocks in the S&P 500 have favorable charts and 85% of smaller stocks offer attractive charts. With the percentages that high again, the bears have to explain why the market is wrong. I will give you these readings each week. As these numbers rise I become more positive and when they eventually deteriorate I will become more defensive. This is something that has worked for me.

The short term picture is a little muddier. There was a negative divergence two weeks ago when the Russell 2000 index failed to reach a new recovery high. All the other indexes reached new highs, so that was a near term sign of concern. We had another near term divergence last Friday. The Dow, S&P 500 and NASDAQ all hit new intraday cycle highs. Again, the Russell failed to match that action. So we must be on watch to see if these negative divergences can be cleaned up over the next several sessions. Short term support levels for the market are the following: S&P 500 1350, Dow 12,875, NASDAQ 2920, Russell 2000 811. Also, keep an eye on the Transports. They had a sharp correction and are attempting to rally off support. The transports went below their 50 day moving average last week and then moved higher. 5088 is now short term support. Based on the way the markets have been acting, pullbacks should remain controlled. Look to see how the markets act at the support levels I just gave you.