Month: February 2014

The S&P 500 and Dow Industrials are headed for a second straight positive week as they dig themselves out of the January correction. The rebound hasn’t been helped by economic data though, which continues to give bears reason to believe there could be more weakness in the market.

Through Thursday, the S&P 500 Index has gained 1.8 percent. The market was pulled higher by technology, utilities, healthcare and industrials, while consumer staples and consumer discretionary lagged. The gain in technology was notable, impart due to the minimal impact caused by Cisco (CSCO), which delivered a negative report. Shares initially dropped, but overall strength in tech helped pull the sector back towards. With a strong day in the markets on Friday, even Cisco could move back into positive territory.

On the negative end of the spectrum were consumer sectors. Retail sales slumped in January and jobless came in higher than expectations. The most commonly cited blame for the weak results was the weather, but this is a stretch seeing as the economic impact of Hurricane Sandy was unnoticeable in national statistics. Many economists predicted an impact from Sandy, but the economy powered right through it. Additionally, one of the areas that saw an increase in sales was gasoline, which contradicts the theory that snow kept people away from stores. That doesn’t mean bears are right to extrapolate a weakening economy, rather economists need to come up with better reason for being wrong in their forecasts.

The one point of strength for the bears is technical in nature: this latest rally has seen declining volume and the market has reached important short-term support/resistance levels. In other words, if this February bounce is a short-covering rally, we will know within the next few days.

As for the biotech and solar sectors that we monitor, some biotechnology indexes did break out to new all-time highs this week. Solar still needs to rally about 5 percent to hit its old high. The big winners in 2014 thus far have been gold and silver miners, as they benefited from the market rally coupled with weak economic data. When investors are optimistic and expect the Fed to extend or increase quantitative easing, precious metals can do well. Coming off a disastrous 2013, they have plenty of ground to recover.

The big news of the day will be Janet Yellen’s testimony before Congress. Any comments she makes on QE will be watched extremely closely; her comments could have a significant impact on stocks this week. Since she’s new to the chairmanship, we cannot speculate what she might say.  Even if we were 100 percent certain of what she will say, a slip of the tongue during the question period could prove to be more powerful than her prepared remarks.

The following are several ETFs you may want to add to your watch list this week.

First Trust Nasdaq Technology Dividend Fund – TDIV

iShares N.A.  Multimedia Networking Fund – IGN

Cisco reports earnings on Wednesday and the stock makes up more than 8 percent of these two ETFs.  Cisco is expected to earn 46 cents per share in the coming quarter, down almost 10 percent from last year. Revenue of $11 billion is expected to be down 9 percent. A further miss could drag the stock, along with TDIV and IGN, lower.

Cisco is trading below its 200-day moving average, though its 50-day moving average has turned upward, the first positive turn since late summer. Cisco is also right near its peak for 2014. Based on the chart, the evidence favors a slightly bullish take for a technical perspective.  However, weakness in China and emerging markets, wholly aside from continued anger over the NSA spying scandal, leaves a slightly bearish take on fundamentals outlook for now.

 iShares Nasdaq Biotechnology – IBB

Healthcare funds are doing well generally.  Biotechnology remains the most important sector to watch because it sits less than 3 percent away from an all-time high. A broad stock market correction is extremely unlikely if the high-fliers of the previous rally are hitting new highs. Additionally, strength is broad across the sector: pharmaceutical and general healthcare ETFs are also on the cusp of hitting new highs.

iShares U.S. Industrials – IYJ

Bulls and bears will also focus on sectors that are struggling in 2014. IYJ sits below its 50-day moving average, which is also turning negative. Very short-term momentum signals indicate the fund could be turning a corner though, and a move above $98.50 is possible.

IYJ is in better shape than SPDR DJIA (DIA), which bounced off its 200-day moving average and has farther to go just to hit its 50-day MA, but where IYJ goes, DIA will follow.

iPath Dow Jones-UBS Copper – JJC

Dr. Copper is the predictor of booms and busts in the economy. The metal rallied in late 2013 on positive sentiment surrounding the U.S. economy, then subsequently plunged in  2014 on emerging market weakness.

Copper has bounced in February, but the metal remains in a general downtrend that began in early 2011. The key support level is $3.00 per pound, or about $37.50 for JJC. Right now, there’s actually more room for copper to run to the upside, but a move as high as $4 would still not signal a bull market, since copper was trading for $4.60 per pound in early 2011. On the downside, it will take a lot of negativity and selling pressure to break $3, something that’s unlikely to occur unless we see the conditions of January repeated.

That $3 level is very strong and will be hard to break, but were it to break, copper could fall a very long ways. For this week, we’ll simply watch to see if the metal can rally along with the rest of the markets.

Several high flying stocks have been pummeled in recent days due to poor reports, the latest being 3D printer maker 3D Systems (DDD) and social media darling Twitter (TWTR).

Shares of Twitter are down about 25 percent from their peak in late December, while shares of 3D Systems collapsed by more than 40 percent (before bouncing intraday yesterday) after peaking in early January. The loss highlights the risk in overvalued shares of companies that rely on optimistic forecasts along with optimistic investors. When the market is doing well and these shares miss their targets, the losses can be substantial in a short period of time. When investors are in a more pessimistic mood though, even a small miss can be magnified and shares can quickly collapse as buyers disappear.

In the wake of these brutal losses, we again took a look at the volatile solar and biotechnology industry, and what we saw is that the bulls still have reason for optimism. These sectors continue to hold up well in the face of major losses for some richly valued stocks. The market as a whole is trending lower, but investors aren’t stampeding yet – major losses are mainly confined to overvalued stocks with weak earnings or guidance.

That doesn’t mean a stampede isn’t possible. The market could quickly sell-off another 3 to 5 percent if investors decide to run for the exits, but there aren’t signs of larger sell-off yet. Investors would do well to remember that we’ve seen this before as recently as last year during brief sell-offs. When investors turn negative, all news is bad news (and when they are optimistic, even bad news is good news). Market gurus and analysts warning about a decline are given the center of attention and some deserve it for making prescient calls, even if one month ago they were nowhere to be found.

Put simply, the financial media is the ultimate herd follower and a rise in negative stories is probably a good sign that sentiment has bottomed in the short-term and a bounce is coming. Some of the stories are legitimate and getting increased focus, such as emerging market credit bubbles and a slowdown in Chinese growth rates, but the media likes to pile on with tertiary negative stories.

European markets already bounced overnight and U.S. markets are headed higher at the open. Look for sectors such as solar and biotech to lead a bounce higher, which would indicate bullish opinion and not short covering, since these sectors haven’t seen the heaviest selling. Consumer discretionary has actually been the worst performing sector this year; if it leads a bounce higher it wouldn’t invalidate the move, but it could mean the bounce is mainly short covering and not a return of the bulls just yet.

Several high flying stocks have been pummeled in recent days due to poor reports, the latest being 3D printer maker 3D Systems (DDD) and social media darling Twitter (TWTR).

Shares of Twitter are down about 25 percent from their peak in late December, while shares of 3D Systems collapsed by more than 40 percent (before bouncing intraday yesterday) after peaking in early January. The loss highlights the risk in overvalued shares of companies that rely on optimistic forecasts along with optimistic investors. When the market is doing well and these shares miss their targets, the losses can be substantial in a short period of time. When investors are in a more pessimistic mood though, even a small miss can be magnified and shares can quickly collapse as buyers disappear.

In the wake of these brutal losses, we again took a look at the volatile solar and biotechnology industry, and what we saw is that the bulls still have reason for optimism. These sectors continue to hold up well in the face of major losses for some richly valued stocks. The market as a whole is trending lower, but investors aren’t stampeding yet – major losses are mainly confined to overvalued stocks with weak earnings or guidance.

That doesn’t mean a stampede isn’t possible. The market could quickly sell-off another 3 to 5 percent if investors decide to run for the exits, but there aren’t signs of larger sell-off yet. Investors would do well to remember that we’ve seen this before as recently as last year during brief sell-offs. When investors turn negative, all news is bad news (and when they are optimistic, even bad news is good news). Market gurus and analysts warning about a decline are given the center of attention and some deserve it for making prescient calls, even if one month ago they were nowhere to be found.

Put simply, the financial media is the ultimate herd follower and a rise in negative stories is probably a good sign that sentiment has bottomed in the short-term and a bounce is coming. Some of the stories are legitimate and getting increased focus, such as emerging market credit bubbles and a slowdown in Chinese growth rates, but the media likes to pile on with tertiary negative stories.

European markets already bounced overnight and U.S. markets are headed higher at the open. Look for sectors such as solar and biotech to lead a bounce higher, which would indicate bullish opinion and not short covering, since these sectors haven’t seen the heaviest selling. Consumer discretionary has actually been the worst performing sector this year; if it leads a bounce higher it wouldn’t invalidate the move, but it could mean the bounce is mainly short covering and not a return of the bulls just yet.