After finishing the previous four sessions at record highs, the S&P 500 fell just short of a new high on Friday. The index posted a gain of 1.28% on increases in three of the four sessions during the holiday shortened trading week. The index has risen in 146 of 250 trading days this year.
Volume fell off substantially from the previous week during the holiday shortened week, with the daily average slipping 47.21% from the exceptionally strong volumes seen the week before. Large volume drop offs during Christmas week are not uncommon, for instance last year the daily average volume dipped 46.51% below the previous week. Even though the coming week will also have a shortened trading day, volumes are still likely to increase, although it is not unlikely they could still be a bit lower than normal.
Major Stock Market Indexes
The major index charts of the Dow Jones Industrial Average, S&P 500, NASDAQ, New York Stock Exchange and Russell 2000 showed these indexes continuing in bullish runs during the past week.
The New York Stock Exchange had the most bullish week. It was the only index to finish each session in the past week higher. It broke above resistance Monday to finish at a new 52 week high and increased it on Tuesday. Thursday’s finish eclipsed the previous record high close seen on Oct 31, 2007 with the increase Friday reaching an all-time highest close of 10,353.22. Intraday price action was very tight, trading within a narrow band from highs to lows, but it finished the final three sessions close to the intraday high.
All five indexes saw the 13 EMA and 50 EMA round bullishly higher and the 13 EMA substantially widen the gap above the 50 EMA.
The New York Stock Exchange’s push to record highs leaves only the NASDAQ short of this milestone. The Dow, S&P500 and Russell all finished the first three sessions at new record highs, while the NASDAQ pushed to new 52 week highs in each of these three sessions. All four finished Friday with small losses.
The Russell 2000 and NASDAQ runs higher appeared to have reached the upper trend line on Tuesday, and both began pushing higher tightly against this trend until falling slightly off this trend on Friday. This gives these charts a somewhat toppish appearance.
The Dow Jones, S&P 500 and NYSE are still short of their upper trend lines, and have continued higher at a measured pace, with one exception; the Dow Jones burst considerably higher on Thursday. It does not seem unlikely the Russell and NASDAQ could continue to push higher tightly against or even break slightly above their upper trend lines while the other indexes continue to make up lost ground.
All of the indexes have reached fully overbought conditions, but it does not seem too unlikely they could hold these levels for the time being. The indexes are showing some signs a pullback maybe near, but they also appear to show it might be too early for this pullback at this point. Is seems possible the indexes could move higher in the week ahead.
US Treasury Charts
The 20 year US Treasury note bounced higher Monday above the upper wedge line in the wedge forming between support and the upper trend line, but the bounce failed at the 50 EMA and it fell to finish lower. The fall continued through the week, breaking through and closing below the previous support on Thursday and continuing lower on Friday. The failure in the wedge break higher and drop immediately after to break below the opposite wedge line at previous support is generally a very bearish sign. This chart continues to look bearish.
The US Treasury price charts continue to exhibit mostly bearish traits, which is generally bullish for stocks.
The 10 year US Treasury Note interest rate rebounded from the previous Friday setback, pushing higher in all four sessions this past week. Tuesday’s close fell just 0.01% short of matching the 52 week high prior to the Christmas break. When trading resumed after the holiday the ten year saw Thursday finish at a 52 week high and Friday increase it. Friday’s finish of 3.01% was the first close above the 3% level since July 21, 2011, when the ten year finished at an identical 3.01%. This chart continues to show bullish traits.
After a small rebound to about 1205 at the open, gold began to retreat Sunday night during Sydney and Hong Kong trading falling back to 1200. Gold rebounded later in Hong Kong early Monday morning, but failed to reach the earlier high, stopping at about 1204 and began to slip late in the session. It continued to fall steeply shortly after the London open reaching about 1193. It again rebounded later in London trading and added a couple points in New York to about 1203. The rally failed as gold fell to 1198, popped back to about 1203, and then fell off to 1197 during the remainder of the New York session, leveling out late in the session and continued to trade between about 1197 and 1199 into Tuesday. After a failed bounce higher late in Hong Kong and into early London trading to about 1201, it began a slow trend higher from 1197 during London trading that carried through into New York’s early close for Christmas Eve at 1205.30. When trading resumed Christmas night gold slipped after the Sydney open to about 1202, rebounded to about 1205 and fell again after the Hong Kong open to about 1203 Thursday morning. It rebounded again to about 1205 into the London open where it traded flatly until the New York open. It rebounded steeply at the NY open with the rally reaching 1216 and then fell back to about 1210. The pullback resulted in all the gains seen in this push higher occurring in the first thirty minutes. It held very near 1210 until Friday morning in Hong Kong, when it bounced back to about 1215, but dropped back to 1210 soon after the London open holding within a point or so of this level. Gold again broke sharply higher to about 1219 shortly after the New York open, but again trended lower to close the New York Spot at 1213.80 and higher than last week’s close of 1203.50.
Gold moved higher for the week, but showed little in the way of a sustained rally past that seen during a shortened session on Christmas Eve. Nearly all of the upward movement after that was seen in two half hour periods early in New York trading sessions. Neither of those quick run ups maintained a bullish stance through the remainder of the session. Even after the substantial pullback already seen, the run ups during New York trading continue to fail to carry over into other parts of the world. Gold continues to look risky at this time.
S&P 500 Constituent Charts
The charts show that many of the constituents that were in fairly long downtrends appear to be rounding up out of these drops or flattening into bases as these higher or sideways moves have broken above the upper trend line in these downtrends.
Some of the constituents that had been beaten down for long periods of time are beginning to show strong rebounds in their stock prices. These stocks are well below previous highs, leaving a rather large potential for increases.
Long term charts show there are quite a few constituents that are in long trends higher have reached the upper trend line in long term trends. It doesn’t seem unlikely some of these stocks could pullback briefly or trend sideways to allow the upper trend line to build a cushion again. Several of these stocks are showing signs of beginning a sideways move. Some of these stocks have run to high valuations so it does not seem unlikely they could pullback from here.
At the same time some of these stocks are still quite underpriced and are trading at low P/E’s with good earnings growth potential, so it doesn’t seem too unlikely they could continue to trend higher tightly to or even break above the long term upper trend line.
Quite a few of the constituents have positioned themselves against long or short term resistance levels, renewing the chance of potential resistance breaks.
Most of the constituents are in fully overbought conditions, so a round of profit taking could be near; however most constituent charts give the impression they could move higher first. It seems fairly likely that there could be increases in the numbers that hold in or near overbought levels for the time being. It seems possible stocks could continue higher in the week ahead.
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 for the time being and low volatility is most often bullish. The activation of a 90 E is nearing and this indicator is often active during volatile conditions. The presence of this indicator will also activate other indicators which show an increasing chance of volatility.
The +/(-) 90 D indicator that became activate on Oct 7, 2013 will expire in 33 trading days and a 90 E will become active in 20 trading days. The +/(-) 90 D has performed as follows to this point in the format: highest close / lowest close / last close.
+9.90% / -1.23% / +9.86%
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.
+2.19% / -1.51% / 2.16%
The S&P 500 pushed to new all-time high close on Monday and broke above the upper boundary of 100 L resistance. Tuesday and Thursday followed with new record highs and Friday finished just slightly lower than Thursday. As a result the index has finished more than three consecutive days above the 100 L upper boundary. Although the index has not yet closed a full percentage point above this resistance (currently 0.90%), it has moved closer to the likely midrange resistance than it is to the upper boundary of the 100 L. It therefore seems fairly likely this resistance in now dormant.
The midrange resistance likely to be found in the 1850 to 1865 range continues to have the potential to cause a significant pullback. If this pullback is seen, it is likely to remain within the 3% to 5% range. It seems fairly likely the index will reach this resistance during a timeframe that is more susceptible to a letdown. Being so it seems possible the drop could carry the price down near the lower portion of this projection.
The near toggle of the 10 day indicator two weeks ago saw a 3.75% increase during the following ten trading days.
It seems fairly likely the 100L resistance in now dormant.
The next potential resistance is likely to be seen in the midrange resistance level (MRL) from 1850 to 1865. It seems fairly likely this resistance could cause a significant pullback and if this pullback is seen, it seems likely the index could fall in the 3% to 5% range. Although tensions on the index were substantially reduced earlier, it seems possible the index could reach this resistance within a timeframe that is more susceptible to a significant retreat, and therefore it seems possible the retreat could be near the 5% level.
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.
Volumes dropped off considerable during the holiday shortened trading week. These volume drops are not uncommon during Christmas week and volumes usually rebound to more normal levels during New Year’s week.
The overall reduction in active indicators seen earlier generally shows a decreasing chance of volatility with times of decreased volatility generally bullish and most indicators continue to suggest volatility will remain calm for the time being. The activation of a 90 E is nearing and this indicator is often active during volatile conditions. The presence of this indicator will also activate other indicators which show an increasing chance of volatility. Although this volatility is not a certainty, indicators seem to suggest that a more volatile timeframe could be nearing.
The timeframe generally associated with the Christmas Rally ends with the New Year. The beginning of the year is generally a bullish timeframe too; however rounds of profit taking that result in significant drops are more common during this timeframe.
The index charts are beginning to show early signs of topping and are fully overbought.
The +/(-) 90 D indicator that became activate on Oct 7, 2013 is very near a level that it seemed likely it would reach before seeing a pullback when this indicator first became active.
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.
Stock Market Video
This website recently featured an infomercial on the stock market investment page that claimed a crash was imminent in the near future. The video called current market conditions a secular bull market and most indicators agree that we are in a secular bull market. The video claimed a crash was imminent due to one indication, a low rate of return on stock dividends. This low rate was seen in the tops of three other crashes, 1929, 2000 and 2007. The video claimed the pullback from this crash could reach 30% to 50%.
Secular bull markets do have crashes. The problem is a crash of these proportions from the current levels would indicate we have not left the secular bear market. If we are in fact in a secular bull market as the video claimed, a crash of these proportions is probably too deep and too early in the rebound.
As pointed out in past articles, basing an opinion on one indication is often very dangerous. In fact without looking closely at the data, an indication that has appeared bearish in the past, might actually be bullish in this instance.
Are these dividend levels low because stocks are overpriced as they were in 1929 and 2000?
Probably not, the indexes are moderately overpriced based on widely believed long term P/E ratios. As discussed in past articles these P/E ratios are probably too low to begin with due to adjustments made to the data, changes in tax and accounting laws, overlooking changes made to the indexes that had kept these ratios low prior to these changes, errors made in converting the current S&P 500 data into the long term S&P 90 data, along with other factors like index component changes that probably should not have been made. Limiting the data to the period after March 1957 when it includes only the actual S&P 500 and not adjusting it shows that stocks are still underpriced. In summary, stocks are probably not overpriced to levels that would cause a crash and certainly nowhere near the levels seen in 1929 or 2000.
Dividends increase as competition for these investments increase. Look at where the competition is.
Interest rates are hovering near all-time lows on savings. Although moderately increasing, US Treasury yields are still far below historical averages. Other “safe haven” foreign government bonds are at or near historical lows. Corporate bond rates are near all-time lows. The secondary mortgage market rates are near all-time lows. Money Markets are near all-time low rates. Even the rates on “high risk” foreign government debt and junk bonds are well below historical levels. The competition’s rates are at or near all-time lows.
Dividend yields don’t have to be high to compete for these investments, so it does not seem unlikely they would be near all-time lows too.
The rates on many of these investments have been held low a very long time and in 2007 these low rates helped cause a low yielding dividend ratio. It appears more likely the low yield in 2007 was a coincidence during the deflating of the mortgage bubble, and not the cause of the crash due to highly overpriced stocks.
Studies of dividend yields show there were many market crashes without the dividend yields falling to these levels, so using it as an indicator of market crashes appears to be of little value. If this indicator shows highs, it should also show lows. Yet using the dividend yield to determine when stocks should rebound has proven to be ineffective too. Stocks held very high yields during the 70’s, but failed to break from a secular bear market for the entire decade.
Although a low yield could indicate stocks are becoming overpriced, it appears there are other reasons for the low rates at this time. It also seems possible the competition will be increasing rates nearer to normal levels in the future. In turn it seems fairly likely these increases could cause stocks to raise dividend rates to compete for these investments. It therefore seems possible this “bearish” indicator could actually be bullish in this instance.
Studies done in November of 2008 based on a wide range of indicators and market conditions pointed to a likely secular bull market appearing in the rebound from that crash. The data gathered also pointed to a likely secular bull market crash when the S&P 500 reached 2000 to 2100. It concluded that the pullback would likely be in the 20% to 35% range, but most likely less than 30%. Most of the current data continues to support this study.
The study included cycles in stock markets (including dividend yields), commodities, inflation, employment, earnings, currencies, business cycles, the leading indicators, etc. It wasn’t based on one indicator it was as many as could be thought of to include. The study was based on mathematically evaluation of the data, and where past trends were likely to take the then current data. Many indicators were developed from this data and many of these indicators have proven to be useful in determining probably market directions since. Some of them are featured in these articles.
The study found that the gold bubble would likely burst and the treasury bubble would likely burst, and videos were released as the charts indicated likely turning points. The study contended that each would likely return to more normal levels over a long period of time. During this long period of time stocks were likely to increase immensely, with the S&P 500 probably topping out at over 4000 possibly above 4500 before the next secular bear market began. It also indicated that the US dollar would likely strengthen against foreign currencies, reversing a long trend in the opposite direction. This has not happened yet, but currency cycles contend it probably will.
Was this study correct? We probably won’t know completely for many years, but many of the things that appeared likely to happen, appear to be happening. Although not always correct, the indicators that were developed from this data appear to be worthy of watching, and investing in.
These same indicators now appear to be pointing to a significant pullback that is nearing. Is it the market crash warned of in this video? The indicators suggest it is probably not.
The study into stocks that split verses those that don’t continues; however during the study of this data it was found that information gathered from sources considered reliable missed at least one split during the timeframe under study.
Three different sources used to gather and cross check this data missed the same split, that being the 5-for-4 split on July 15, 1987 of Franklin Resources (BEN). As a result the information provided in an earlier article that one share of Franklin Resources bought prior to the 2 for 1 split on January 24, 1986 would have yielded 81 shares was incorrect. It actually would have yielded 100.25 shares. A share of Franklin Resources bought before its first split, a 5 for 4 split on April 7, 1982, would have yielded 632.8125 shares today.
As a result of uncovering this error, information is being gathered from company websites to confirm the listing of splits used in the study and a complete history of splits is being gathered. At the same time dividend information is also being gathered and compared to the data collected earlier. Unfortunately not all company websites provide this information, so Emails will be sent to investor relations representatives requesting this information as they are found.
To this point only two stocks have been found that have not split and trade on the exchanges that fit the guidelines used in the previous study. Several Over the Counter (OTC) stocks were found that fit these guidelines, but volumes levels of OTC’s are not always accurately reported and earnings data is also generally not available. It appears that stocks are more apt to split now than when the original study was made. As a result the guidelines were relaxed to include a larger sample size of exchange traded stocks.
Of course there are a few exceptions to the rules used for stocks that split and stocks that don’t in previous articles. These exceptions are under investigation and valid reasons for some of these exceptions have been uncovered. In most cases the information gathered and analyzed to this point supports the original thesis that over the long term stocks that split increase in value faster.
There is still much work to be done before this study is complete and it will likely be expanded further. When it is completed, it will likely be the subject of a feature article.
Many of these sources of information were used in this article.
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Disclosure: The author is currently about 85% invested long in stocks in his trading accounts. Although his investment level remained unchanged, he purchased one issue with the cost of this purchase partially offset by the sale of one issue and dividend payments. The author feels he is slightly oversold at the current time; however he has and will continue to sell stocks that reach long or short term targets. He will also continue to add stocks he feels are at a great value through a variety of buy orders. He will receive dividend payments from 22 issues in the coming week and eight in the following week. If no further investment changes were made during this timeframe these dividend payments would reduce his investment level. However; in order to present an investment level unaffected by market fluctuations week to week the investment level present in these articles is based on the yearly balance of the previous year. Due to the increases seen in balances this year the investment level will increase beginning with the New Year, which falls within the coming week.
Some of the trades made during the past week may have been due to repositioning investments as discussed in a previous article.
Disclaimer: The information provided in the Stock Market Preview is the author’s perception of the current conditions and what he thinks is the most probable outcome based on the current conditions, the data collected and extensive research he has done into this data along with other variables. It is intended to provoke thought of the possible market direction in readers, not foretell the future. The author does not claim to know what the stock market will do. If the stock market performs as expected, it only means he is applying the stock market history to the current conditions correctly. His 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.