The Return Of Joe Friday

Includes: DIA, IVV, IWM, QQQ, SPY
by: Financial Sense

By Tom Smith

I date myself by making reference to the of TV show Dragnet. When Sgt. Joe Friday was on the case he focused on "just the facts". That is what I try to give in my weekly effort. As for what it means or the deeper philosophical meaning, I'll leave that to the strategists. I have to invest money in real time for real clients with real money. So, it appears logical that I should gather as much data as possible that actually drives the market. Also, I need to be fairly adept at understanding what the market is telling me as opposed to what the "experts" have to say.

The market has risen steadily since the recent low reached on October 9th. The decline into the second week of October was just shy of 5%. The long awaited pullback came as the powers that be in D.C. stumbled about. The Dow reached a critical support level that day and miraculously the news from Washington turned positive and away we went. The strength of the recent advance has caught both bulls and bears by surprise.

Over the past several months the market has increased by more than 10%. During the advance, interest rates have been flat and oil prices have been falling. This is similar to great market environments in the '80's and '90's. We are experiencing noninflationary growth. In that type of environment P/E multiples expand.

What is good for the consumer is good for the market. "The consumer is tapped out"; "Wage growth is not enough"; blah blah blah. There have been countless calls announcing the end of the consumer. Our economy is 70%+ consumption. The consumer has received a huge pay hike or tax cut through the trend in gas prices. Gas prices are $0.60 off the 2013 highs. Each $0.10 decrease in gas prices puts $13 billion in the pocket of the US consumer.

Free cash flow measures for the consumer are also at record high levels. When you consider the steep drop in gas prices along with tame food price inflation and lower interest rates you can see the consumer is in better shape than a year ago.

The technical condition of the market is still strong. While there are fewer stocks in basing or advancing positions than earlier in the year things are better than they were six weeks ago. 76% of stocks on offer in the S&P 500 are in either basing or advancing positions.

That figure above is based on a time tested manner for evaluating stock charts. After runs in the market several people attempt to make a call on the top or bottom. To me that is a fool's errand. The better use of our time is to determine what the market is actually doing and not to make predictions as to what it will do. With more than three-quarters of the stocks in the S&P 500 in strong shape technically (that figure improved 6% last week) the bulls must be given the benefit of the doubt.

The same methodology gave us a different reading in January of 2008. During that time, 73% of stocks were in declining of topping patterns. To call a top is easy...and often lazy. Tell me what prism you are using to read the tea leaves. Right now the LEI's are ticking higher, the consumer has more money in their collective pocket and the market is in strong shape technically.

The Russell 2000 failed to take out its resistance level of 1124. Since the other averages went through resistance, the failure of the Russell sets up a potential negative divergence. Support levels for the S&P 500/Dow/NASDAQ/Russell 2000 are as follows: 1744/15,500/3854/1077. Keep an eye on these levels.