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Weekly market recap: Largest drop in the markets since 2012

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For the week ending January 25, 2014

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Overview

With little U.S. economic news this past week, the markets focused on poor corporate news (although the news overall was mixed), China's flash PMI, and funds shifting to safety. By the end of the week, equities had the worst drop since June, and the worst week for the markets overall since 2012.

On the corporate side, disappointing news from Verizon, IBM, Johnson & Johnson more than offset the good news from Delta, Netflix, Alcoa, United Technologies, and SanDisk.

Of greater concern was the drop in China's flash PMI which came in below 50 (a key inflection point representing a contraction in manufacturing) at 49.6; down from prior month's 50.5. This concern overshadowed the net favorable economic news from Europe.

The lack of strong buying by Asset Managers on the drop Thursday is a reflection that investors moved money to safety to hold onto gains made in 2013.

Overall, based on U.S. economic data, the fourth quarter was strong, but ended somewhat soft with housing flattening and manufacturing somewhat positive.

The focus next week will be on the FOMC on Wednesday and their decision to taper on a schedule (a fixed reduction monthly), or more slowly based on economic data (data dependency). A second look at housing will occur with new home sales, while durable goods orders will determine if the momentum in manufacturing continues.

We expect continued volatility next week as investors wait for the FOMC Minutes Announcement and other critical economic data. Market direction will be dictated by the response to the Fed tapering decision on Wednesday.

Market Gauge

Year-to-date the markets are down: Dow -4.2%; S&P500 -3.1%; Nasdaq -1.2%.

The Markets for the past week were: DJIA down -3.5%; S&P500 down -2.6%; Nasdaq COMP down -1.7%.

Commodities (ETFs) for the past week were: Gold (GLD) up 1.12%; Silver (SLV) down -1.79%; Oil (OIH) down -2.95%; Dollar (UUP) down -0.92%; 30-yr Bonds dropped 11 basis points to 3.64%.

The VIX this past week (a measure of market sentiment and volatility) rose to 18.14 due to growing concerns over China, mixed corporate earnings, and uncertainty over the FOMC tapering decision.

Top Headlines

In the U.S., JPMorgan's Dimon says economy firing on all cylinders; US manufacturing growth slows; Fed 'out of ammunition' to tackle economy, says economist Edmund Phelps; jobless claims tick higher as labor market thaws; home resales strongest in 7 years; study finds upward mobility has not changed in last 20 years; Michigan governor to support Detroit aid package; US factories close out 2013 on strong footing; tale of two consumers as sentiment slips; US jobless queue shortens for 2nd straight week; US housing starts pause for breath in December; factory growth accelerates, but outlook worsens; Obama plans factory jobs as millions left behind; World Bank: global economy at a turning point and set to accelerate; resurgent gas fuels jump in Dec producer prices; US businesses expect consumers to spend more; and Fed could ignore ugly jobs data for now.

In Europe, French Financial Manager says: We're not building the Soviet Union; BoE keeps an eye on forward guidance, says Carney; Prudential CEO says: We are not concerned about China; Ukraine risks 'civil war', says EU justice chief; China must accept global banking standards, says ex-UK PM; UK's Cameron leads 'march of the makers' back home; biggest risk for 2014 is stress tests, says Van Steenis; will UK turn its back on forward guidance policy?; Nokia share drop after 17% fall in 2013 sales; southern Europe risks a 'lost generation', says World Bank; Rusal CEO: only discipline will help market; Roubini doom scenario: it looks like 1914 again; Euro zone business activity rises beyond expectations; youth unemployment EU's 'single biggest crisis', says Irish PM; Italy Financial Minister: Recovery under way, but jobs will lag; how Norway plans to protect its millionaires; 'I'm not in favor of EU political union', says Dutch PM; British banker stirs up storm by mocking Singapore's 'poor'; Portugal could cope without credit line, says Minister; and Berlusconi faces new prostitution investigation.

In Asia, Thai rice subsidies: damned if you do, and don't; are fears over an Australian housing bubble overblown; economist Stiglitz: Abe's Japan plan has a problem with corporate tax reduction plan; China becomes top gold consumer in 2013; HK billionaire to double dowry for gay daughter; world's largest bank won't compensate investors; Samsung posts first profit decline in 2 years; emerging markets to pay the price if Abenomics fails?; no rollback of gold restrictions in India; China's factory activity shrinks, first time in 6 months; will Tesla's Model S succeed in China?; Hyundai posts first sales drop in 3 years; has Thailand's unrest hobbled the central bank?; South Korea's growth figures show recovery intact; is the Japan story getting threadbare?; rigor and risk in India central bank reform push; Thai market may muddle through state of emergency; Japan's PM issues veiled threat to China over arms race; and Daimler's watershed bond deal in China.

Weekly Review

On Monday, markets closed for Martin Luther King Day.

On Tuesday, with selling in IBM and Verizon after disappointing earnings, the Dow dropped -0.3% to 16,414.

On Wednesday, with continued selling in IBM, the Dow dropped -0.5% to 16,373.

On Thursday, with soft economic data from housing and the PMI manufacturing flash indexes from the US and China, the Dow dropped -1.1% to 16,197. Gold rose $25 to $1,260.

On Friday, with the mix of soft economic data and the tapering of Fed stimulus, the Dow dropped -2.0% to 15,879. Gold rose $10 to $1,270.

Next Week's Calendar

The economic calendar for next week is full: on Monday – New Home Sales, Dallas Fed Mfg Survey; on Tuesday – Durable Goods Orders; on Wednesday – FOMC Meeting Announcement; on Thursday – Weekly Jobless Claims, GDP, Pending Home Sales Index; and Friday – Personal Income and Outlays, Employment Cost Index, Chicago PMI, Consumer Sentiment.

If the Markets move down, stay on the side lines or consider Contra ETFs. For Option players, selling premium is advised. To learn more about options and earning consistent weekly income, go to optionsannex.com.

To the Charts (see charts above)

The following ETFs (DIA, SPY, QQQ) provide a technical review of the Market (and are also excellent Option trading vehicles). Represented are the Dow Industrials (DIA), S&P500 (SPY), and Nasdaq 100 (QQQ).

The Charts for each include views for Monthly, Weekly (including Price Channels), and Daily (including monthly Pivot Points) with MACD and Stochastic indicators. The Pivots are: white for central pivot point; yellow for R1 and S1; magenta for R2 and S2; red for R3 and S3.

DIA

The Dow Industrials (DIA) closed down at 158.48. If the DIA drops, then the next level of support will be at 157.07 (weekly chart); the next level of major resistance is 165.51 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bearish posture (down Arrow) with the MACD positive but weakening, and the Stochastic moving down above the overbought area.

The daily chart indicates a bearish posture (down Arrow) with the MACD negative and weakening, and the Stochastic moving down below the midpoint.

SPY

The S&P500 (SPY) closed down at 178.89. If the SPY drops, then the next level of support will be at 177.32 (weekly chart); the next level of major resistance is 184.94 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bearish posture (down Arrow) with the MACD positive but weakening, and the Stochastic moving down above the overbought area.

The daily chart indicates a bearish posture (down Arrow) with the MACD negative and weakening, and the Stochastic moving down toward the midpoint.

QQQ

The Nasdaq 100 (QQQ) closed down at 86.74. If the QQQ drops, then the next level of support will be at 82.45 (weekly chart); the next level of major resistance is 89 (weekly chart).

The monthly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving up above the overbought area.

The weekly chart indicates a bullish posture (up Arrow) with the MACD positive but weakening, and the Stochastic moving down above the overbought area.

The daily chart indicates a bearish posture (down Arrow) with the MACD positive but weakening, and the Stochastic moving down above the overbought area.

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