Maybe I should have talked bad about the market sooner. The move on Wednesday pushed the indexes higher, but it still showed some doubt the last hour. The small-cap stocks were the clear winner adding more than 2% on the day. Basic materials were up 1.35% and financials gained 1.6%. This pushed the S&P 500 (SPY) index above the 1320 mark, the NASDAQ (QQQ) to July highs near 2860 and Dow (DIA) to July highs of 12,755. There is still the matter of breaking above these resistance points going forward. If we are going to break higher there will need to be a sustainable catalyst for the broad markets. There lies the current challenge for the bulls… commitment?
The economic data helped on Wednesday as the ADP job report showed 170,000 private sector jobs added. That is well below the pace in December, but positive nonetheless. ISM manufacturing was at 54.1% up from December, but light of the expected 54.5%. Construction spending was up 1.5% well ahead of expectations and auto sales were ahead of expectations at 14.2 million. The data are still positive, but not great. Thursday and Friday are filled with more insights to the economy and could lend a helping hand to the bulls. These data alone are not going to provide the catalyst unless there is something big coming that isn't in the current forecast.
Facebook's (FB) IPO is ready to hit Wall Street for $5 billion. There is no price or date currently, but it is grabbing plenty of headlines. Why bring this up as a market catalyst? An offering with this much buzz could impact the sentiment toward stocks near term. If nothing else is will create some buzz around the water cooler.
The three primary sectors we need to lift the markets are Technology, Financials and Healthcare. They account for more than 40% of the total weighting of the S&P 500 index. Tech has done its part for the move higher and recently broke above the 706 resistance point leading the sector to a new high. Financials have been pushing higher as well, but stalled on all the European debt exposure rumors. The move back above 265 on Wednesday helped maintain the uptrend in play, but it needs to regain the upward momentum. Healthcare is at the July highs and looking to push through this resistance. Thus, all three are in a good spot to help the catalyst to the upside, and lead. They are the focus short-term for the catalyst.
The global markets are throwing their support behind the move to the upside as Europe (IEV) moved above the $36.10 resistance. The EAFE index is pushing higher as well gaining 1.6% on Wednesday. Emerging markets were up 2.1% also to aid the outlook for the world markets overall.
The parts are in place to continue the move higher, but there are still issues and worries facing the upside of this market. Here are some concerns that keep me on edge relative to the advancement of the current trend.
- Shipping data remain weak. The Baltic Dry Index has declined considerably showing weakness relative to the prices of shipping goods. The last month has shown a big drop worthy of attention. This may be a seasonal issue, but it may be an indicator relative to the global economic conditions.
- The level of debt issued by the U.S. Treasury Department relative GDP. No one in Washington seems to notice or care?
- Short interest is very low. In fact, it at levels similar to April of 2011, when the market hit a high and reversed.
- Volume heavily favors upside leveraged ETFs more than the downside leveraged ETFs. Negative indicator short term.
- Short interest in QQQ at a 10-year low? Overbought indicator toward large-cap technology stocks.
None of these is an indicator that Rome is burning, but they do show a bias on the upside that is overdone short term. Warning signs are just that. Manage the risk and adjust your stops accordingly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.