A discussion of Cyprus and the FOMC.
leeb's market forecast
With stocks setting one new high after another and the S&P overbought at 8 ½ percent above its 200-day moving average – amid a back drop of only modest economic growth and myriad looming problems such as the fast approaching March 1 Sequestration deadline – it pays to look market indicators that can give you an unbiased view of what’s coming down the pike. And believe it or not, quite a few indictors are giving stocks the green light, signaling further gains are in store. The best markets are those in which the small cap shares are out in front leading the advance. One proprietary indicator we use examines the broad market by combing two measures of small cap performance, the unweighted average of all stocks on the NYSE and the advance/decline line, while taking into consideration standard deviations of the pair. Right now, with the broad market acting as well as it has in recent months, this indicator is flashing a buy signal that has an 800 percent batting average in generating not only positive returns in the subsequent 3- and 6-month periods, but above-average returns, especially for the small cap shares but for blue chips as well. Another indicator that agrees in the High/Low Logic Index. Put simply, the paltry number of stocks hitting new 52-week lows right now is typically associated with markets that are positioned for strong advances. Moreover, it would be highly unusual for stocks to undergo a sizable correction before this indicator worsens. That might happen of a period of months, but for now all systems are go. That said, and here’s where our emotions come into play, we admit that we’re a bit doubtful that blue chip stocks can punch through their record highs set in 2007 on the first try. We’re little more than 2 percent away now for the S&P 500. But we remain optimistic and we’ll see how things play out. And if the indicators start to deteriorate, we’ll certainly let you know.
The US Federal Reserve kept its unprecedentedly easy monetary policies in place as US GDP unexpectedly contracted in the 4th quarter of 2012. However, markets should hold up well due to massive liquidity injected by the Fed reduction of risks.
Greg discusses an indicator that historically has an 89 percent accuracy.
Investors did a bit of profit taking today coming on the heels of last week’s strong up-move. The major averages slipped three- to four-tenths a percent. Hardest hit were utilities, down more than a full percent, while the telecom and heath care sectors managed to print positive returns on the day. Overall, growth-oriented shares lost significantly less than value stocks. While there are still unanswered questions regarding the fiscal cliff and the debt ceiling – which will have to be addressed in the coming months – and the fourth-quarter earnings season is likely to be lackluster (as was the case last quarter), the stock market is acting well these days. The blue chips, as measured by the S&P 500 reached a 5-year high (on a closing basis) last week, while our proprietary measure of small cap performance, using the unweighted average of all stocks traded on the NYSE, reached an all-time high, pointing to the broad-based nature of the advance.
Further signs of thawing in the frozen talks surrounding the fiscal cliff gave stocks a lift today. Republicans appear to be ready to give up ground on taxes while the Dems appear to be ready to conceded on Social Security and perhaps other spending. The S&P 500 gained more than a full percentage point by the closing bell with volume positive by a better than 4-to-1 margin. Leading the charge were Financials (up 2.1%), Consumer Discretionary stocks (up 1.8), and Utilities (up a surprisingly strong 1.5%). All 10 S&P Sectors were positive on the day. From a longer-term perspective, one significant event to occur was the Japanese elections over the weekend. The conservative Liberal Democratic Party won an impressive super majority in the lower house, bringing the party’s chief Shinzo Abe back to power as Prime Minister three years after a disastrous one-year stint as the PM. Japanese voters were clearly fed up with the ruling Democratic Party of Japan, but also at work was Abe’s promise to do whatever it takes to bring down the value of the yen to make Japanese exports more attractive, kick-start the country’s ailing economy and reach deflationary escape velocity. To achieve these goals, Abe has pledged to take over the independent Bank of Japan and introduce even more aggressive monetary policies, which you can interpret as more money printing, among other actions. Of course if Abe thinks the United States and Europeans are going to sit on their hands while he devalues the yen he’s sadly mistaken. With inflation-adjusted interest rates already negative and likely headed further below the zero mark, this makes the already strong case for precious metals even more bullish. Get em’ while they’re still cheap.