Stocks: Love 'em or hate 'em

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I guess it depends on what week we are talking about.

Two weeks ago “experts” were all over the airwaves telling me about the doom that will be wrought by the fiscal cliff and why it made perfect sense to throw out any and every stock that pays a dividend. The fact they could go on TV and act like they were offering helpful insights is equal parts sad and dangerous. Great, you sold a bunch of stocks a few weeks ago. Did any of these fiscal cliff experts tell you what to do with the money now? Last week the market rallied off of severely oversold levels. People were running from stocks like the plague two weeks ago. Now the S&P 500 begins the week at pre-election levels. 

One thing that was curious about the last selloff was the stocks that led to the downside. Large stable companies with proven histories of paying and increasing their dividends sold off far more sharply than the overall market. The stocks that people gravitate to when the market gets tough were the first to be sold a few weeks ago. I have no idea what will happen in a short period of time, but over the long run those types of stocks tend to do pretty well.

Stocks finished the holiday shortened week with a sharp advance higher last Friday. Transportation and technology stocks were strong at the end of the week. Union Pacific continues to be a leader in the railroad industry. Apple continued to spike off the recent lows in the $505 range. Apple traded over $588 as I write today.

Economic data from the housing front continued to surprise to the upside. Housing starts hit an annualized rate of 894,000 units. This was 50,000 ahead of consensus expectations. Many numbers on the economic front are coming in above consensus forecasts and above each and every forecast that makes up the consensus.

When the market pulled back in April of this year the LEIs had a corresponding decline. The economic and market data displayed a certain rhythm that made sense. Last week I talked about the divergence between market and economic data. I suggested that the divergence will have to be cleared up soon. Either the market would stabilize and move higher or the LEIs would roll over. The data from the economic front remains positive. Information released last week regarding housing was very positive. 

The driver of this downturn appears to not be economic data; the key is negative investor sentiment. Investor sentiment remains near bear market lows as consumer confidence reaches multi year highs. The investment world acted very aggressively to sell anything that wasn’t bolted down after the election. I am not a political person, but, did I miss something with regard to the elections? The polls predicted the outcome for several weeks. There was much to be angry about if your choices didn’t carry the day but the results weren’t overly surprising.

Then people realized this thing called the Fiscal Cliff could impact our lives. Is this really news? It appeared that the rational thing to do a few weeks ago was to sell every stock that paid a good dividend because of potential tax changes. So, let get this straight. I should sell a stock today at a gain and incur taxes that I must pay in a few months because of changes that could take place at some point! Now tell me what in the world people are going to do with the money they raised a few weeks ago? I can’t be certain but next week, next month, at some point they are likely going to buy some stocks with the proceeds. Still doesn’t make much sense to me.

As I said last week, the technical picture was taken over a few weeks ago by fiscal cliff panic selling. Several interesting things happened on the technical front over the past several days of trading. The percentage of bullish advisors hit a low not seen since the last bottom (the advisor sentiment number is a contrary indicator), the NASDAQ gave its first stochastic buy signal in quite some time, the advance-decline readings hit extraordinarily oversold levels, and then the market averages all went above the near term levels I gave you last week.

The S&P 500 and the Dow are now both above their respective 200-day moving averages. Watch the 2985 level on the NASDAQ. If the tech heavy NASDAQ index can get above its 200-day moving average that would be a good near term sign for the market. Last week was the opposite of the prior week’s rout. There was some pretty undisciplined buying last week. Based on the activity last week I am going to suggest you focus on the respective 50-day moving averages for the major indexes as critical levels of resistance. Those levels for the S&P 500, Dow, NASDAQ/Russell 2000 are as follows: 1426/13,253/3041/825. Based on the slope of the line down through these levels as the market broke down, expect these to be stern resistance levels when the market first tests them.

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About Thomas J Smith CFA