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Weekly market recap: Volatility on the rise

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For the week ending February 1, 2014

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Overview

This past week ended the worst month since May 2012 as the markets adjust to the second tapering by the Fed on Wednesday, along with mixed economic news and earnings reports. During the week the markets were broadly range bound with the Dow showing weakness, and the Nasdaq showing some strength.

The Fed's decision was to taper again, reducing purchases by another $10 billion monthly leaving asset purchases at $65 billion monthly; $30 billion for mortgage-backed securities, and $35 billion for long-term treasuries. This decision caused the markets to decline, helped along by poor earnings from Yahoo and Boeing. The decision to continue with gradual tapering was expected, and now the markets are uncertain as to the impact globally, especially with emerging markets showing signs of distress.

The Fed chairmanship of Ben Bernanke comes to an end as the Fed vice chair, Janet Yellen, officially takes over the chairmanship next week. The handover, as expected, has gone smoothly as Yellen's viewpoints are essentially the same as Bernanke's.

The statement released by the Fed continues its dovish tone, stating "that growth in economic activity picked up in recent quarters" whereas the prior statement was "economic activity is expanding at a moderate pace". It was noted that the labor market is improving but unemployment is still "elevated". In addition, the report stated "that inflation persistently below its 2 percent objective could pose risks to economic performance". In conclusion, the Fed sees continued improvement in the economy going forward which was the rationale for additional tapering.

The economy overall is improving. The increase in real GDP in the fourth quarter was due primarily to exports (up 11.4%), non-residential investments (up 3.8%), personal consumption expenditures (up 3.3%), private inventory investments, and government spending (state and local); the decreases to GDP came from imports (increased), federal spending (declined), and residential investment (declined).

Inflation remains low at 1.3% (vs. 2.0% prior quarter), with the core price index dropping to 1.7% (vs. 1.9% prior quarter).

Overall, the private economy remains moderately strong, but is now showing signs of having softened late in the fourth quarter - notably in manufacturing and housing. The Consumer sector is showing continued strength and is expected to carry the economy forward over the current quarter.

The focus next week, after a poor jobs report of 74k gain, will be the Employment Situation data on Friday. The jobs number is expected to be 181k with an unemployment rate at 6.7%. Other data of interest will be ISM's manufacturing numbers after a sharp drop in durable goods orders last week.

We expect continued volatility next week as investors wait for the release of the Employment Situation data, and the global impact from the additional Fed tapering last Wednesday.

Market Gauge

Year-to-date the markets are down: Dow -5.3%; S&P500 -3.6%; Nasdaq -1.7%.

The Markets for the past week were: DJIA down -1.1%; S&P500 down -0.4%; Nasdaq COMP down -0.6%.

Commodities (ETFs) for the past week were: Gold (GLD) down -1.80%; Silver (SLV) down -3.71%; Oil (OIH) down -0.61%; Dollar (UUP) up 0.97%; 30-yr Bonds dropped 4 basis points to 3.60%.

The VIX this past week (a measure of market sentiment and volatility) rose to 18.41 due to growing concerns over the global effects of tapering and mixed corporate earnings.

Top Headlines

In the U.S., is this what Twitter commerce will look like?; Chicago PMI shows prices up, jobs ebbing; US consumer sentiment dips in January; Consumer spending jumps but incomes flat; Why Obama’s legacy may be slipping away; Jobless queue lengthens as 4th quarter growth slows; Pending homes plunge, surprising economists; US mortgage applications near flat in latest week; Wall Street jobs to increase, but there's a catch; Not so durable: Orders slide, cast pall on economy; Obama gets pledges from big business on unemployed; Fed taper will remain slow and steady: CNBC Survey; US consumer confidence rises, tops estimates; Despite selloff, Fed fears, don't worry: Economists; New US home sales drop 7 percent, miss estimates; Dimon: Economy starting to fire on all cylinders; US 'out of ammunition' to solve economic rut: Pro; more bumps ahead as market awaits big report; investors pull $12 billion from emerging markets; why so many ex-NFL players struggle with money; for some, retirement is out of reach; for others it's boring; Germany must use military more, says president; time to close Wal-Mart stores? Analysts think so; ex-ally says Christie knew about GWB closings: NYT; economy’s sticky problem: Older and jobless; Keystone XL oil pipeline clears significant hurdle; and approve the Keystone pipeline already: Pickens.

In Europe, What baseball can teach UK soccer; Euro zone inflation falls again; What the EM sell-off means for Europe; State Street fined $38 million; Italy's anti-establishment party bids to impeach president; London sees record construction boom in 2013; 'Currency War' end-game could be good for Russia; Could Hungarian currency sell off like Argentina’s peso?; 'Fat finger error' sees HSBC shares spike 10%; Greek PM promises hefty budget surplus, recovery in sight; Check it out: Technology creates a nation of thieves; 21-year-old raises $1 million to help panicked students; Danish government in peril over Goldman-led deal; Ukraine's President on sick leave in midst of crisis; Shell to step up asset sales after poor profits; 'Better than a poke in the eye': Spain GDP up 0.3%; BSkyB CFO: Strong results show 'no distraction'; Deutsche Bank suspends forex trading desk exec; Euro zone's biggest bank misses 2013 profit target; Diageo sales up 1.8% despite 'mixed up' markets; Roche 2013 sales fall but CEO confident; Carney to Scotland: Be careful what you wish for; Europe cracks down on banks' riskiest trades; and Euro zone money supply dries up, pressuring Draghi.

In Asia, Toyota seat issue could prompt recall; IMF calls for ‘urgent action’ in EM; A hard landing in China: The risks in one graphic; No silver bullet for growling EM beast; Bitcoin back: Major exchange resumes yuan trading; Why China doesn't face a hard landing in Year of the Horse; Five reasons to be positive on the Philippines; Japan’s inflation uptick puts 2% target in sight; India's anti-graft party scrambles to dispel doubts; China's yuan carry trade, an anchor and a risk for Asia; Japan December core CPI up 1.3% on year, above view; A storm’s coming…and these cities should watch out; China internet groups see taxi apps as growth driver; No peer pressure: Why Malaysia won't join EM rate hikes; Chinese can’t say neigh to feng shui in year of the horse; Philippines Q4 GDP up 1.5% on quarter, beats expectations; HSBC PMI tips weak start to 2014 for China’s economy; Buying opportunities abound as Nikkei falls: Analysts; Singapore’s horse racing scene set to whinny in 2014; Google selling Motorola phone business to Lenovo; China originates 35% of 'nuclear bomb' cyber attacks; Beijing reins in fireworks as Year of The Horse starts; and Australia backs Toyota in legal battle.

Weekly Review

On Monday, with new home sales report exceptionally weak, the Dow dropped -0.3% to 15,837.

On Tuesday, despite large unexpected drop in durable goods orders, the Dow rose 0.6% to 15,928.

On Wednesday, with another leg of Fed tapering, the Dow dropped -1.2% to 15,738.

On Thursday, with mixed economic news led by good GDP data, the Dow rose 0.7% to 15,848. Gold dropped $20 to $1,245.

On Friday, with flat economic data and concern over emerging markets, the Dow dropped -0.9% to 15,698.

Next Week's Calendar

The economic calendar for next week is full: on Monday – Motor Vehicle Sales, ISM Mfg Index, Construction Spending; on Tuesday – Factor Orders, FedSpeak; on Wednesday – ADP Employment Report, EIA Petroleum Status Report, FedSpeak; on Thursday – Weekly Jobless Claims, International Trade, Productivity and Costs, FedSpeak; and Friday – Employment Situation.

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 156.75. If the DIA drops, then the next level of support will be at 155.68 (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 below the overbought area.

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

SPY

The S&P500 (SPY) closed down at 178.18. If the SPY drops, then the next level of support will be at 176.88 (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 below the overbought area.

The daily chart indicates a bearish posture (down Arrow) with the MACD negative but strengthening, and the Stochastic moving up below the oversold area.

QQQ

The Nasdaq 100 (QQQ) closed down at 86.27. If the QQQ drops, then the next level of support will be at 83.98 (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 negative but strengthening, and the Stochastic moving up at the oversold area.

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