Update: Week Ending February 1, 2014

Includes: DIA, GLD, QQQ, SPY
by: Nasser Khraishi

It was a tough week. Yet, the consolidation - as it seems it is one - was highly needed. Unfortunately, it appears that the DJIA is the one that actually felt the brunt of the market action. For the S&P 500 and the NASDAQ composite, the action was short lived, even though it was perceptible size-wise.

In conclusion, the DJIA touched the high of mid-September, and is not yet in a recovery mode. The NASDAQ composite hardly touched the values of mid-December, while the S&P 500 did achieve the lows of mid-December.

What is next? I guess technical traders are supposed to be able to read tea-leaves. I have normally shied away from that. In this case, I really cannot tell! My short term oscillator has bottomed on Monday at around -75% - not seen since October - while the mid-term oscillator (I do not publish it here) is still at the bottom of -45%, which we did not see for longer than that. My long term indicators are still very negative!

If I were in the tea-leaves-reading business, I would say that this is indicative of a rolling correction. That is, we will get a number of consolidations over a long enough period of time that the total effect will be an overall multi-week correction. Yet, the jury is out and the verdict will come in the form of the January labor report - this coming Friday - and the Fed notes - February 19th. After all, the Fed meeting and the GDP numbers both gave the economy a vote of confidence. Further, since many retailers will report earnings this coming week, I think by the time the labor report is out on Friday, things will be primed either for a recovery or for a correction. We can still call the action of these last couple of weeks a certified consolidation - except for the NASDAQ.

For trading set action, Dow Chemical (NYSE:DOW), Apple (NASDAQ:AAPL), and Caterpillar (NYSE:CAT) had earnings related action, which gyrated given the impact of Monday. Yet, AAPL was the biggest loser of the week.

In other news, Geron (NASDAQ:GERN) had the most-feared event by small company investors: stock secondary offering at a below market price. Guess what: market capitalization grew by 50% on the day of the offering! Was this an overhang that was removed or a typical market idiosyncrasy? I do not know, but I guess the market does what it wants to do.

Verizon (NYSE:VZ) got the approval for the takeover of the remaining portion of the Verizon Wireless business. This actually resulted in the company stock price defying gravity for most of the week. Actually, given the return on equity and growth of the wireless business, this is a very good transaction for VZ.

In sector notes, some budding recovery in retail, industrials and railroad is starting to show. Of course a rising market will magnify that, especially if the Friday labor numbers are good. As these sectors are highly sensitive to the overall macroeconomic environment, this makes sense.

Treasuries acted in an awkward way this week. The net result was a significant drop in rates. Just like the prior week, this played well for mREITs in particular, as Annaly (NYSE:NLY) is in my trading set. Yet, I would be very careful, as the macroeconomic numbers-- to be confirmed by the labor numbers and the Fed meeting notes-- seem to be good. Hence, rising interest rates, given the Fed's stated goal of a 2% inflation, still seem inevitable in the mid- to long-term. For NLY in particular, it should be releasing earnings this coming week (or next), and in these earnings you need to look at book value. In the accompanying presentation you need to look at portfolio, hedge, and financing structure, including company reported sensitivities, which they did a good job in reducing the period before from the period prior.

Gold (NYSEARCA:GLD)'s attempt to stage a reversal halted, even thought prices swung violently. Yet, despite the consolidation in the equity markets, GLD ended the week below where it started.

Looking at the Fed balance sheet, I still cannot see the reduced purchases manifesting themselves in January, but I guess that is just me!

My regular table for the indices follows.

Index/ETF Symbol and Name Daily 3-EMA-7 Weekly 3-EMA-7 Perceived Trend
SPX S&P 500 Index Down Up Negative
DJIA Dow Jones Industrial Average Down Up Negative
COMP NASDAQ Composite Index Neutral Up Negative
GLD SPDR Gold Trust ETF Up Down Neutral
VIX CBOE Volatility Index Up Neutral Positive
FVX CBOE 5 Year Treasury Note Yield Index Down Up Negative
TNX CBOE 10 Year Treasury Note Yield Index Down Up Negative
TYX CBOE 30 Year Treasury Bond Yield Index Down Neutral 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 "sold" value of -40%. The lowest value was a clear "oversold" of -75% on Monday - similar to the reading in mid-October. This is in contrast of the nearly "oversold" reading of -63% in the previous week. This improvement is indicative of an improving short-term sentiment. This, as noted above, is not shared by the mid-term indication of the "Daily 3-EMA-7″ column in the table below.

The full trading set table is as follows.

Symbol and Company Name Daily 3-EMA-7 Weekly 3-EMA-7 Perceived Trend Is a Current Holding?
GERN Geron Corporation Neutral Up Neutral Yes
JPM JPMorgan Chase & Co. Down Up Negative Yes
GS The Goldman Sachs Group, Inc. Down Up Negative
WFC Wells Fargo & Co. Neutral Up Negative
NLY Annaly Capital Management, Inc. Up Down Positive
MO Altria Group, Inc. Down Neutral Negative Yes
T AT&T Inc. Down Down Negative Yes
VZ Verizon Communications Inc. Down Down Neutral Yes
GPS The Gap, Inc. Down Down Neutral Yes
ANF Abercrombie and Fitch Co. Up Down Positive
JWN Nordstrom, Inc. Down Neutral Negative Yes
TGT Target Corporation Down Down Negative Yes
DIS The Walt Disney Company Down UP Negative
MCD McDonald's Corp. Down Down Negative Yes
MDLZ Mondelez International, Inc. Down Up Negative
BA The Boeing Company Down Up Negative
LMT Lockheed Martin Corporation Neutral Up Positive
CAT Caterpillar Inc. Up Up Positive
DE Deere & Company Down Up Negative Yes
EMR Emerson Electric Co. Down Up Negative Yes
DOW Dow Chemical Co. Up Up Positive
ADM Archer, Daniels, Midland, Co. Down Up Negative
MON Monsanto, Co. Down Up Negative
POT Potash Corp. of Saskatchewan Inc. Down Neutral Negative
PFE Pfizer Inc. Down Up Neutral
BMY Bristol-Myers Squibb Company Down Up Negative
ABC AmerisourceBergen Corporation Down Up Negative Yes
AAPL Apple, Inc. Down Up Negative Yes
INTC Intel Corporation Down Up Negative Yes
CSCO Cisco Systems, Inc. Neutral Down Negative Yes
HPQ Hewlett-Packard Company Up Up Positive Yes
CVX Chevron Corporation Down Down Negative
BP BP plc Down Up Negative
NGG National Grid plc Up Up Neutral
NI NiSource, Inc. Up Up Positive
WMB Williams Companies, Inc. Up Up Positive
WM Waste Management, Inc. Down Neutral Negative Yes
CNW Con-way Inc. Down Down Negative Yes
CSX CSX Corp. Down Up Neutral
NSC Norfolk Southern Corp. Up Up 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.