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The indices, and in particular DJIA, showed some signs of topping, though not significant. The shorter term charts are indicating a consolidation for the DJIA but much less so for the NASDAQ Composite and the S&P 500. Bond rates were dented, while Gold (NYSEARCA:GLD) continued its attempt to stage a reversal.

The week as a whole looked more schizophrenic than one would like. First, the released Fed meeting notes seem to suggest that the governors did see the need to taper, but at the same time extend the short term commitment; in essence deferring to next Fed meeting (January 28-29) any tangible clues.

After all, factory orders for November were less than consensus, but the ISM for December was better. Then, the private sector hiring was well above expectations, and the weekly jobless numbers were better than expected. Yet, the monthly jobs report was much lousier than expected, but the unemployment number was better than expected.

In some sense, this may be good for the markets. You see, mean-reversion can happen because market prices consolidate, correct or crash to approach the mean, or such prices can hold within a range for a while giving the averages time to catch up in a gentle, non-volatile way.

This brings an issue that I touched upon the last two weekly updates, which is the possibility of a correction. Even though at the face of it I made both arguments sound like typical "technical analysis," which has its believers and disbelievers, in reality both arguments are correct mathematical and financial arguments.

You see, my first mention was centered around the excessive separation between current market pricing and the monthly moving averages. This chart captures the issue.

(click to enlarge)

I should refer to this argument as the "George Soros" argument. You see, in his book "The Alchemy of Finance," this is the type of argument that Soros used to suggest impending reversal. It is a solid financial argument, not because Soros said it, but because in John Hull's book "Options, Futures & Other Derivatives" it is asserted that market prices follow a random path described by the following stochastic process:

dP(t) = μ(t) P(t) dt + σ(t) P(t) dz

Where

  • P(t) is the market price as a function of time
  • μ(t) is the expected rate of return for this equity or commodity
  • σ(t) is the volatility of standard-deviation of this equity or commodity
  • and, dz is the normally distributed random element (called Wiener process) that affects market prices

The above is what I keep on referring to as a "mean-reverting, log-normal random process."

Now the second argument I made relating to expecting an impending correction was related to the ratio of the combined market cap of the S&P 500 stocks to the overall GDP. This is actually Mr. Warren Buffett's argument - mind you, this is a 2001 interview. Let me repeat the chart one more time.

(click to enlarge)

Line 1 is similar to what Mr. Buffett was talking about in that interview, with B and C representing the NASDAQ, and then general market crashes.

Incidentally, the Fed statement did sound concerned about the lack of inflation and the need to watch that. This goes back to my repeated assertion that the Fed is more concerned about deflation than inflation. Hence, as long as you see that or similar language in future statements, you can be assured that short term interest rates will remain low.

My regular table for the indices follows.

Index/ETF Symbol and NameDaily 3-EMA-7Weekly 3-EMA-7 Perceived Trend
SPXS&P 500 IndexUpUp Positive
DJIADow Jones Industrial AverageUpUp Positive
COMPNASDAQ Composite IndexUpUp Positive
GLDSPDR Gold Trust ETFNeutralDown Positive
VIXCBOE Volatility IndexDownDown Negative
FVXCBOE 5 Year Treasury Note Yield IndexUpUp Negative
TNXCBOE 10 Year Treasury Note Yield IndexNeutralUp Negative
TYXCBOE 30 Year Treasury Bond Yield IndexNeutralUp Negative

As usual, the reminder is that the movement of the treasury yields is negatively correlated with the price of the underlying instrument.

As for my trading set, my short term "Perceived Trend Oscillator" stood at a "neutral" +25%. This is in contrast to the "bought "reading of 38% in the previous week. Here it is worth mentioning that it actually bottomed at +3% on the 8th. As you can see from the table below, I am more vested in the market this week than last, even though there were not many fresh signals during the week, but I attempted to take as many as I can.

I did write an article on why I dropped JC Penney (NYSE:JCP) from my trading set, and gave brief reasons for choosing Target (NYSE:TGT). On this note, ironically, TGT made it back to the news, just as they announced better than expected holiday sales. The issue was again the security breach of customer data. As it turns out, at the time of this writing, more retailers are coming forward and admitting similar problems. I have not quantified the impact on the retail sector yet, and most probably that will take time till more is known on the scale and impact of the issue. Clearly it did not affect my choice of target - the first retailer to admit. Further, as I only gave brief reasons for choosing TGT in the above mentioned article, remember that Target gives back 5% of its profits to communities, and hence the amount of community goodwill should - theoretically - be much higher for them than for others with no such programs.

The full trading set table is as follows.

Symbol and Company NameDaily 3-EMA-7Weekly 3-EMA-7 Perceived Trend Is a Current Holding?
GERNGeron CorporationNeutralUp Positive Yes
JPMJPMorgan Chase & Co.UpUp Positive
GSThe Goldman Sachs Group, Inc.UpUp Positive
WFCWells Fargo & Co.UpUp Positive
NLYAnnaly Capital Management, Inc.NeutralDown Positive Yes
MOAltria Group, Inc.DownUp Negative
TAT&T Inc.DownDown Negative Yes
VZVerizon Communications Inc.DownDown Negative Yes
GPSThe Gap, Inc.NeutralDown Positive Yes
ANFAbercrombie and Fitch Co.UpDown Positive Yes
JWNNordstrom, Inc.DownUp Negative Yes
TGTTarget CorporationNeutralDown Neutral Yes
DISThe Walt Disney CompanyUpUP Positive
MCDMcDonald's Corp.DownDown Negative Yes
MDLZMondelez International, Inc.UpUp Positive Yes
BAThe Boeing CompanyUpUp Positive Yes
LMTLockheed Martin CorporationUpUp Positive
CATCaterpillar Inc.UpUp Positive
DEDeere & CompanyUpUp Neutral
EMREmerson Electric Co.NeutralUp Negative
DOWDow Chemical Co.NeutralUp Negative
ADMArcher, Daniels, Midland, Co.NeutralUp Negative
MONMonsanto, Co.NeutralUp Negative
POTPotash Corp. of Saskatchewan Inc.UpNeutral Positive
PFEPfizer Inc.NeutralUp Positive Yes
BMYBristol-Myers Squibb CompanyUpUp Positive
ABCAmerisourceBergen CorporationUpUp Positive Yes
AAPLApple, Inc.DownUp Negative
INTCIntel CorporationUpUp Neutral
CSCOCisco Systems, Inc.UpDown Positive Yes
HPQHewlett-Packard CompanyUpUp Negative
CVXChevron CorporationNeutralUp Negative
BPBP plcUpUp Positive
NGGNational Grid plcUpUp Neutral
NINiSource, Inc.UpUp Positive Yes
WMBWilliams Companies, Inc.UpUp Positive
WMWaste Management, Inc.DownUp Negative Yes
CNWCon-way Inc.NeutralNeutral Positive Yes
CSXCSX Corp.UpUp Positive
NSCNorfolk Southern Corp.UpUp Positive Yes

Disclosure: It is important that you understand and agree that all information provided in this newsletter rely on publicly available data and tools with no guarantees of quality or suitability for any purpose, and that I can be long or short in any of my trading-set equities, at any time, with or without regard to indicated trends and described analytics, and that I do not give buy or sell or any other financial recommendations, and that any and all actions based on this commentary are solely the responsibility of the reader.

Source: Update: Week Ending January 11, 2014