Stock Market Update 15 February 2013

MARKET PULLBACK IMMINENT

Over the past 13 trading days the markets have been churning in a very narrow range.  In fact, Wednesday Bespoke Investments pointed out the following:

Dead Market

Wednesday, February 13, 2013 at 03:04PM

The market has certainly stalled out lately, but we didn't realize it was this extreme. Over the last 13 trading days, the difference between the Dow's intraday high and intraday low has been just 1.35%. This is the lowest hi/lo spread for the Dow over a 13-trading day period that we've seen throughout this entire bull market (since 3/9/09). In fact, it's the lowest 13-day hi/lo spread since December 1986! It's been more than 25 years since the Dow has had a tighter range over a 13-trading day period.

It is obvious the markets are pausing at present levels to assess whether the remarkable advance over the past month is warranted.  Clear technical indicators are telling me there is a high probability we are about to commence a correction.

While price has continued to advance, the internals of the market have begun to decline.  I will highlight 4 charts:

CLICK ON ALL CHARTS TO ENLARGE


NYSE Percentage of Stocks Above their 50 Day Moving Average:

Over the past 2 trading weeks the price of the NYSE has remained within a tight range yet the number of stocks above their 50 day moving averages (considered "short term") have declined.  As such, fewer and fewer stocks within the index are supporting current price levels.  This is dangerous and indicates a short term correction could take place soon.


NYSE Percentage of Stocks Above their 200 Day Moving Average:

Similarly, over the past 2 trading weeks the price of the NYSE has remained within a tight range yet the number of stocks above their 200 day moving averages (considered "long term") has moved into overbought status (as indicated on the chart, I use a 10 day exponential moving average and a level of 80% as my overbought indication)

As can be seen, this level unto itself does not mean necessarily a decline is imminent.  However, close observation will show after a protracted bear market decline (note 2002 and 2007 bottoms) the overbought nature of the markets tends to allow the indicator to remain above 80% for some time prior to a pullback.  Subsequent overbought conditions within the ongoing bullmarket resulting in shorter periods above 80% prior to pullbacks (Jan 2005, Mar 2007, Jan-May 2008).

We are now again above 80% and the clock is ticking.


NYSE New Highs:

On Jan 24th price entered a tight range (as shown by the blue box) on the NYSE index.  However, the number of new 52 week highs has continued to decline as shown by the blue downward sloping trendline.  Less and less stocks are able to achieve new 52 week highs yet price has yet to move.

Normally this is the 1st sign of a bear market decline.  Confirmation comes from new lows.

NYSE New Lows:

As can be seen, the number of new 52 week lows has remained stable since November 2012.  On 3 occasions so far (Jan 02, Jan 24 and Feb 12) the number of new 52 week lows has attempted a breakout. 

When the number of new lows begins to move significantly higher (above 60) the correction will begin in earnest.


ACWI Weekly:

When the correction begins it will important to judge its character.  Typical corrections within bull markets will test the following:

Daily charts (not shown in today’s update)

-unfilled gap from beginning of 2013 at 48.08 = -4.2% decline from present level

-100 day moving average (currently at 47.53 = -5% decline from present level
-200 day moving average (currently at 45.63 = -9% decline from present level

Weekly Chart

-previous resistance turned support at 48.38= -3.6%
-previous resistance turned support at 47.01= -6.3%
-38.2% Fibonacci Retracement at 44.84 (also Nov 2012 low) = -10.64%
-
Monthly Chart (not shown in today’s update)

-8 month moving average (currently at 46.99) = -6.3%
-10 month moving average (currently at 46.07 = -8.2%

Any monthly close below the 10 month sma (along with my month technical indicators in agreement) would signal the beginning of a new bear market with at least a 20% decline expected.


Bottom Line:

-the market is severely overbought.
-the current internals of the market are declining.

My current expectation is the market is in the process of topping.  I expect a decline will commence soon to the previous Nov 2012 area (approx 10% decline from current).  I do not think the coming decline will be the end of the current bull market and following the decline a further advance will transpire into the fall of 2013-early 2014 to new highs before the next bear market begins.

Unfortunately opinion does not count.  Trading and investing  is based upon probability.  At today’s price the probability of a significant advance is low; the probability of a significant decline/correction is high.  As such, it pays to be cautious at these levels.

I continue to invest 100% of my monthly A/B contributions into equities as discussed in previous updates.  My core holding continues to be in a 50% equity/50% USD cash model position (which of course moves slightly up/down based upon market prices and my ongoing monthly contributions).  I have tightened stops in all my trading accounts as well as clients accounts.

Those who are heavily overweight equities may want to consider their current holdings.  Should you be near retirement it would be wise to consider reducing exposure.  Those who feel they can endure a possible 30% + decline in their portfolio (should a new bear market commence with the coming decline; a low probability I believe at this point but always possible) may elect to stay in equities.  Each individual is different based upon risk tolerance, years to retirement, assets and mental makeup ("sleeping well at night" during a decline).

I've always enjoyed sleeping well based upon the old saying:

"It is much better to be out of the markets wishing you were in, than being in the markets wishing you were out".


My positions remain unchanged as of today (with possible rotation to 25% equities 75% cash under consideration dependant upon upcoming technical indicators):

-Russell Global 90 Fund: 40%

-Fidelity International Fund: 10%

-Russell USD Liquidity II Fund: 50%


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