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Stock market preview for the week of December 16, 2013

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The S&P 500 pushed to a record high close of 1808.37 Monday, but fell in the remaining sessions and as a result finished lower for the second straight week, shedding 1.65% in the process. The index has finished lower in nine of the past 11 sessions, but has still risen in 140 of 241 trading days this year.

Although the selloff continued, volume began to slump into the selloff, dropping 3.49% from the volume seen in the week earlier and 3.63% lower than the average volume during selloffs this year. Wednesday had the highest volume with Friday’s pullback having the weakest.

Congress looks to have matured since last October and appears set to come to an agreement on a budget without delaying until the eleventh hour. Despite the fact the budget looks very good for businesses overall, and provided stability and certainty in some sectors that could have seen the golden egg slip away, investors continued to fret the agreement would likely speed the inevitable reduction in the Federal Reserve’s easing policy.

The news of this agreement prior to the Federal Reserve’s scheduled meeting in the week ahead could lead to an announcement of plans to begin tapering. Although news of this tapering is often met bearishly, but it usually presents a buying opportunity as most times stocks rebound shortly after this selloff.

Major Stock Market Indexes

The major index charts of the DJIA, S&P 500, NASDAQ, NYSE and Russell 2000, continued to show some bearishness in the past week.

Even the NASDAQ chart showed a chink in its bullish armor. The NASDAQ started the week on a bullish note as it broke a new 52 week intraday high and close Monday, but then saw a somewhat bearish three day pullback. Wednesday it dropped below its 13 EMA for the first time since Oct 20, and has remained below it since. Friday rebounded but was turned back at the 13 EMA. Although the drop started from Monday’s higher high, Friday’s rebounded began from a lower low than the previous cycle. The three day stint under the 13 EMA is the longest since a five day drought that ended Aug 21. Overall the chart still looks bullish, but it is showing some signs of weakness. So far it is finding support near the 4000 level which is a bullish sign.

The S&P 500 pushed to a new all-time high close Monday, but fell short of an all-time intraday high. It slipped for the remainder of the week and has seen a bearish stretch of nine lower closes in the past 11. The S&P also fell below the 13 EMA Wednesday, and failed to rebound back above it before the week ended. That three day stint is the longest below the 13 EAM since the three straight that ended on Oct 9. Since Monday failed to reach a higher intraday high, the fall was from a lower high and the drop reached a lower low than the previous cycle. Even though this chart is looking somewhat bearish, it too has so far found support near the lower boundary of the 100 L, which is also a bullish sign.

The Dow Jones has closed lower in eight of the past 11 sessions. The two day rebound that ended Monday was well short of the previous high, and the ensuing drop dipped below the previous low, being the second lower low. The Dow also has spent three days blow the 13 EMA, but spent three days below this level previous week too. So far it has rebounded near the 50 EMA, and although it has slipped slightly below this level, it hasn’t finished below it which is a bullish sign.

The Russell 2000 has closed lower in six of the past ten sessions. The two day rebound that ended Monday was well short of the previous high, and the ensuing drop below the previous low. It has spent four days below the 13 EMA and three days below this level in previous week. It dropped slightly below the 50 EMA Wednesday and closed twice below it before Friday rebounded to close back above it. So far it has rebounded both near the 50 EMA and 1100 level, and although it has finished slightly below the 50 EMA it rebounded back above this level quickly, which are bullish signs.

The New York Stock Exchange has finished seven of the past ten sessions lower. It fell from a lower high and reached a lower low for the second time. It has finished three straight sessions below the 13 EMA to go with the three straight a week ago. It has finished the past two below the 50 EMA, and also failed to hold the 10000 level in the retreat. This chart is currently the most bearish looking of the five.

The drops have brought the indexes into or near fully oversold conditions. The indexes continued to show bearishness, but most showed signs they could rebound.

US Treasury Charts

The price on the 20 year US Treasury note broke back above the 13 EMA on Tuesday but fell back below it Wednesday, continuing the bearish failures at or near the 13 EMA. It fell until it neared previous support and rebounded above it Friday. The current downtrend is forming a wedge on this support level, which is fairly likely to break in one direction or the other during the coming week. This support continues to look prone to failure. The news appears to hold little reason to be bullish on treasuries, and the upcoming Federal Reserve meeting could give even less reason to be bullish. It therefore seems possible when the initial break of support happens, it could drop fairly steeply on this break. Overall this chart continues to look bearish.

The US Treasury price charts continue to exhibit bearish traits, which is generally bullish for stocks.

The 10 year US Treasury Note interest rate fell in the first two sessions this past week, rebounded in the next two, and then slipped again on Friday. The current run continues to hold the 13 EMA and the drop this past week brought this chart back out of overbought conditions. Although it hasn’t fallen to oversold, it doesn’t seem unlikely it could still hold in or near overbought. This chart continues to show bullish traits.

Gold

Gold traded within a fairly narrow bandwidth of about 1225 to 1232 Sunday night through the New York open Monday where it pushed higher to break above 1241. It traded levelly from there between about 1239 and 1246 until rallying in the London open Tuesday to about 1250, then spiked higher early in the New York open to about 1268, fell to about 1260 then held within about +/- 3 of that level until gradually falling lower during the Hong Kong open to 1255 early Wednesday. It pushed up to about 1262 through the early session in New York, before falling back to about 1252 late in the NY trading. It held between 1252 and 1256 until late in the Hong Kong open Thursday when the price began to drop steeply with the fall slipping to about 1228 in early NY trading. It leveled off again trading between 1230 and 1225 until bouncing lower late in Hong Kong trading Friday and continuing to fall to about 1221 early in London trading before starting to trend higher into NY trading and finishing the week at 1238.70. The New York Spot closed Friday at 1238.70 and higher than the previous week’s close of 1229.20.

Although some contend a bounce in gold could be near, gold looks risky. It continues to appear the New York market pumps the price up to have profits taken by the rest of the world, including the Asian market that was supposed to hold the buyers in recent gold bug reports. The reverse pump and dump could wear thin on New York buyers. Absent the bump ups seen mainly during the New York open over the past couple months and noted in chart action summaries in recent articles, gold could already be well below the previous low of 1179. A fall through 1179 probably continues to 1000, but possibly all the way to support at around 760. Although it will probably bounce higher on the way down, or at one of the support levels, it might not make it back to where it is now in any bounce it takes later, at least not until the next bubble that could be decades away.

Gold continues to show signs of a long term downtrend that could take many years to unfold.

Many of the gold miners have shelved plans of production increases and put holds on developing new mines. These delays are not expected to last weeks or months, but many years. Although some will point to this as reason to buy because supply will fall short, the reason the producers are scaling back is a soft market and their actions show they expect a soft market for many years. They have been in the game a long time, following their lead is often a good idea.

The main reason the market is soft is those that bought and held gold earlier are now selling and saturating the market, leaving little room for new supply. It seems more likely to get worse instead of better.

Most of the reasons gold bugs gave to buy gold earlier in the gold bubble have failed to materialize and smart money left in droves earlier. Recent buyers appear to be mostly unseasoned traders with pushes of fad sales to low income household investors and this fad appears to have faded quickly. These investors are not likely to hold into losses. There are likely still many that bought waiting for the end of the world, but as gains melt or losses mount, eventually they too could become sellers. It appears very large downward pressures are still present. Downside risk looks much greater than upside potential.

S&P 500 Constituent Charts

The decline on the index has brought many of the constituents into or near fully oversold conditions. Most of those that are not have continued very bullish runs higher, but some are also beginning or continuing rebounds from oversold conditions.

Many of the constituents that trade in fairly large and fairly long cycles have fallen to levels that offer long term support in these cycles.

Some of the indicator stocks broke recent trends higher in the past week, although most continue to hold trend and some are rebounding from recent lows.

Many of the constituents appear to be reaching appealing prices.

Most of the constituents are holding long or short term uptrends, and although a few have broken these trends, they are near alternate rebound points such as the 50 EMA. Overall the constituents are not showing bearish divergence and are mostly oversold. It seems fairly likely they could begin to rebound in the week ahead.

Indicators

The +/(-) 90 D, (-)/+ 90 D and 100 L indicators are currently active. See a more detailed description of the indicators developed through research here.

The overall reduction of active indicators seen earlier generally shows a reducing likelihood of volatility. Most other indicators suggest that volatility could remain calm and low volatility is most often bullish.

The +/(-) 90 D indicator that became activate on Oct 7, 2013 has performed as follows to this point in the format: highest close / lowest close / last close.

+7.89% / -1.23% / +5.92%

The (-)/+ 90 D indicator that became active on Nov 25, 2013 has performed as follows to this point in the format: highest close / lowest close / last close.

+0.33% / -1.51% / -1.51%

The S&P 500 rebounded to a new all-time high Monday, but failed to break free of the influence of 100 L resistance, again falling back in the upper portion of this resistance level. The drop rebounded at the 1800 midline support initially Tuesday at 1801.75, but fell through this support Wednesday. Thursday and Friday found support near the lower band of the 100L resistance at 1775 with rebounds at lows 1772.28 and 1772.45 respectively and finished both days slightly above this support at 1775.50 and 1775.32. There remains a potential for a significant pullback in the 100 L; however it continues to seem fairly unlikely. The index has fallen to nearly fully oversold, so it seems possible the support found near the lower resistance boundary could hold.

The continued pullback in the 100L has also continued to reduce tensions that seemed likely to be near peak levels as the index reached the midrange resistance in earlier projections. The midrange resistance is likely to be found in the 1850 to 1865 range. These tensions could rebuild, although it is beginning to seem fairly unlikely due to the short run higher to this resistance. This resistance continues to have the potential to cause a significant pullback, but as a result of the reducing tensions, it seems less likely it could cause the larger drop that seemed possible earlier. As a result the projected drop range has been adjusted to 3% to 5%.

The 10 day indicator is nearing a high condition, but has not yet toggled on.

Current Cautions

The index continued to struggle with the 100 L, but support in the lower level has held up so far. There continues to be a potential for a significant drop within the 100 L, however due to the time of year the resistance within the 100 L might not be strong enough to cause a significant pullback. It seems most likely that if a significant pullback is seen within the 100 L it would be seen in the upper portion of this resistance level, possibly falling from near the upper boundary. If a significant drop is seen, it does not seem likely it would exceed the 3% level by much.

There is reason to be cautious as the S&P 500 moves through the 100 L resistance. Although the index is showing some bearish signs, it appears to be maintaining a mostly bullish posture. It continues to find and rebound off support near recently broken resistances.

Volume levels began to decline as the selloff progressed with the lowest volume in the past week seen in Friday’s selloff, being over 11% lower than the average selloff seen this year. The drop in volumes into the selloff often indicates the selloff could be nearing the turning point higher.

An overall reduction in active indicators over the past month or so generally shows a decreasing chance of volatility with times of decreased volatility generally bullish. The upcoming Federal Reserve meeting could increase volatility, but most indicators continue to suggest volatility will remain calm.

There appears to be only one midrange resistance level between the 100 L’s once the index breaks above 1800. That resistance is likely to be seen from 1850 to 1865. Although it is still too early to tell for certain, it seems fairly likely this resistance could cause a significant pullback. If this resistance should cause a significant pullback, the timing that the index reaches this resistance could be a determining factor in the depth of this drop. Tensions likely to be seen as the index reaches this level reduced from earlier projections, but it seem possible this resistance could still cause a 3% to 5% pullback.

Not all data needed to determine how the index might react at this resistance level is available at this time and any projections about this resistance are preliminary. The projections made about this resistance level could change over time as this data becomes available.

Please note there is no established resistance at the MRL levels; the index has not reached these levels before. They are the most likely levels that resistance will be seen based on research. Back tests of the data used to project these resistance levels work well, but they are not allows exact, and these resistances could react sooner or later than expected, it is also possible the resistance will not be seen at all.

There continues to be many reasons to be bullish at the current time. Any pullbacks in stock prices seen along the way are probably a good opportunity to add.

Comments:

MasterCard Inc. (MA) announced that it would split its stock 10-1 in the past week. The split is effective for shareholders of record at the close of business on January 9 with share distribution to be completed on January 21. They also announced an 86% dividend increase resulting in an increase from the current $0.60 to $1.10 share ($0.11 per share post-split). The $0.50 increase is the largest single dividend increase to date by MasterCard.

As noted in last week’s weekly preview, MasterCard had been averaging 474,382 shares per day since breaking above 700. During Wednesday’s session, the day after the announcement, it had a volume over five times the average seeing 2,546,000 shares traded while the stock price pushed 3.53% higher.

The research into recent stock splits has begun. The latest format for data collection of the S&P 500 spreadsheet used for much of the information used in these articles began in Oct 2008 and this new format included noting splits. These notes uncovered 40 companies with stock splits during this time frame. None of the stocks removed from the index during this timeframe had splits prior to being replaced. Although data after replacement was kept on some of these companies, it was not kept on all of them. None that data was continued on had stock splits after replacement, so this data did not provide any additions to the 40 company sample.

Five of these splits were reverse share splits. In the original study, which still has not been recovered, reverse splits were not included but will be looked at in this study. Some of the companies in the original study will also be looked at, as they have some very interesting statistics since.

Most of the data needed to do the analysis has been gathered, but the analysis process is far from complete. Instead some points of interest will be included this week.

Of the 40 companies with splits since Oct 2008, the company with the largest share increase during its split history is The Coca-Cola Company (KO). One share bought prior to its first 2:1 split on June 1, 1977 has grown to 96 shares today. The next highest split total is held by Franklin Resources, Inc. (BEN). One share bought prior to its first 2:1 split on Jan 21, 1986 would have split into 81 shares today.

There have been much higher split totals from past splits though. For instance Microsoft (MSFT) had one share bought prior to its first 2:1 split on Sept 21, 1987 return 288 shares today. Although Microsoft was not one of the 40 most recent splits, it was used in the original study and will be looked at again in the new study.

The lowest share total in the 40 that split belongs to E*TRADE Financial Corporation (ETFC). E*TRADE split twice 2:1 before its 1:10 reverse split on June 10, 2010 that resulted in one share being bought before its first 2:1 split on Feb 1, 1999 being only 0.4 shares today.

Not all reverse splits resulted in lower share totals over the company’s history though. One share of Citigroup Inc. (C) bought prior to its first split of 2:1 on March 13, 1987 would have been equal to 2.4 shares after the May 9, 2011 1:10 reverse split.

Although it is often the case, not all reverse splits are the result of actions taken to avoid possible exchange delisting due to a stock’s price remaining under $5 for long durations. While E*Trade, Citigroup and Tenet Healthcare Corp. (THC) had reverse splits to prevent possible delisting from the exchange they were trading on, it should be noted that two reverse split for other reasons. Duke Energy (DUK) reverse split due to a merger and Expedia, Inc. (EXPE) reverse split due to a spin-off.

Lets look at how those splits affect dividend payouts. Coca-Cola currently pays a quarterly dividend of $0.28 a share. Based on the 96 post-split share accumulation since its first split, that one share would pay $26.88 per quarter or $107.52 yearly. Based on the presplit share price on May 31, 1977 of $71.87, Coca-Cola pays a quarterly dividend yield of 37.40% and a yearly yield of 149.60% on the initial investment. Early investments in many that do split pay even greater dividend yields than Coca-Cola.

Not all stocks that split pay dividends at the time of the splits, but they often do later. For instance Microsoft had all nine of its splits prior to paying its first dividend of $0.08 a share on Feb 19, 2003, the day after its last split. Based on the 288 post-split share accumulation per share invested and a $115.00 closing price the day before the first split on Sept 21, 1987, Microsoft paid a yearly yield of 80.14% on that first dividend. Since raising the dividend to $0.28 it is paying a yearly yield of 280.49%

There were companies that paid over 100% yields per quarter in the first study.

Many of these sources of information were used in this article.

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Have a great day trading,
ronz

All of my past articles can be accessed here.

Disclosure: I have investments in KO, MSFT and DUK. I do not have investments in MA, ETFC, C, THC or EXPE. I am currently about 86% invested long in stocks in my trading accounts. Although my investment level remained unchanged, I made month dividend reinvestments in three of my holdings and purchased one issue with the cost of those purchases more than fully offset by the sale of two issues and dividend payments. I consider myself slightly oversold at the current time; however I have and will continue to sell stocks that reach long or short term targets. I will also continue to add stocks I feel are at a great value through a variety of buy orders. I will receive dividend payments from 9 issues in the coming week and 7 in the following week. If I make no further investment changes during this timeframe these dividend payments will reduce my investment level.

Some of the trades made during the past week may have been due to the repositioning some of my investments as discussed in a previous article. My trading level may be elevated for a time until the realignment of these stock positions are complete.

Disclaimer: What I provide in the Stock Market Preview is my perception of the current conditions and what I think is the most probable outcome based on the current conditions, the data I have collected and the extensive research I have done into this data along with other variables. It is intended to provoke thought of the possible market direction in my readers, not foretell the future. I do not claim to know what the stock market will do. If the stock market performs as I expect, it only means I am applying the stock market history to the current conditions correctly. My perception of the data is not always correct.

This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.

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