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Tom Aspray, professional trader and analyst was originally trained as a biochemist but began using his computer expertise to analyze the financial markets in the early 1980s. Mr. Aspray has written widely on technical analysis and has given over 60 presentations around the world. Many of the... More
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  • The Week Ahead: The Good, The Bad, Or The Ugly? 0 comments
    Feb 2, 2013 1:44 PM | about stocks: SPY, DIA, IWM, XLV, GLD, QQQ

    anuary was clearly a bullish month for stocks, and MoneyShow's Tom Aspray digs into previous years with hot starts to see what investors might expect in 2013. However, although this rally may have some room left, there may be more important considerations if you already have substantial gains.

    After a record-breaking week, investors were closely watching Friday's monthly jobs report to see if it would dampen the recent enthusiasm regarding the stock market. Instead, the report showed that job growth in 2012 was better than most thought, and the Dow Industrials and S&P 500 made new highs for the week and closed strong.

    Clearly, stocks have gotten the public's attention. Even the local TV channels have devoted more time to discussing the stock market. Many have focused on the January Barometer-historically when stocks are higher in January, it is a positive sign for the whole year.

    A recent Wall Street Journal article reported that since 1929, a higher January close in the S&P 500 has resulted in an average 13% gain. This is in contrast to the average 3.6% loss in those years when stocks are lower in January.

    Of course, within these averages there has been a wide range in performance, and we have seen the full gamut in the last 20 years. Let's take a look at the good, the bad, and the truly ugly years, so we are better prepared for 2013.

    Click to Enlarge

    The performance in 2013 was the best since 1997, and we can all hope that this year turns out as well. In January 1997, the S&P 500 was up 6.1%, but then bottomed out on February 18, as it dropped 10.4% from the January close. This took the S&P 500 to 733.5, which was slightly below the 1996 close of 740.7.

    The rebound from the April lows was very impressive, with the S&P finishing up 31% for the year. There was plenty of volatility during the year, including a 13.6% plunge in October 1997.

    By comparison, 1994 could be considered a bad year given the averages. In January 1994, the S&P 500 gained 3.3% and peaked on January 31 at 482.8. Given the scaling, the drop into the lows on April 4 looks much worse than 6.5%.

    That turned out to be the low for the year. Prices came close to the January high in August, when the S&P 500 reached 477.6. For the year, the S&P 500 was down 1.8%.

    Click to Enlarge

    Still, this does not look that bad compared to 2001, when the S&P closed up 3.5% in January. The high for the year came at the end of January, as it dropped 18.7% to a low in the latter part of March.

    The S&P rallied over 17% from this low and hit the 78.6% Fibonacci retracement resistance in May before the sellers again took over. At the year's lows in September, the S&P 500 was down 31.3% from the January close. The S&P 500 was able to rally for the rest of the year, but still closed down 13.1% .

    So what will 2013 be like?

    As I discussed at the end of December, I felt strongly that the market would have a double-digit gain during 2013. Given the performance so far this year, this does not seem too hard, as the S&P 500 could make it back to the all-time highs of 1,576 sometime this year. That is just 4.2% below current levels.

    The weekly NYSE Advance/Decline chart that I discuss later does not show any signs of a major top, but that does not mean we won't see some very sharp corrections during the year. In fact, I expect it. I think the yearly S&P 500 charts and the 2012 performance chart of SPY I featured recently make it clear that one can not afford to be complacent at any time.

    There are plenty of economic and political hurdles that are likely to make the market nervous this year. The Euro crisis has been on the back burner recently, as the sentiment toward the Eurozone has certainly changed. The sharp rally in the euro has clearly helped, but the region has not yet solved its problems.

    It was another week of mixed economic news. On the positive side, durable goods orders and the Dallas Fed Manufacturing Survey were both considerably better than expected. Also on the manufacturing front, the Chicago PMI came in at 55.6 while most were expecting just 50. This encouraging data was in line with Markit's US Manufacturing flash report featured last week.

    On the negative side, Consumer Sentiment took a dive to 58.6 from the prior month's 65.1, which caught many forecasters by surprise. The chart shows that the prior lows and the uptrend have been broken, but higher stock prices could help stabilize the sentiment next month. The GDP was also negative at -0.1%, while most were expecting a 1% rise.

    There is a much lighter schedule this week, with factory orders on Monday and the ISM Non-Manufacturing Index on Tuesday. On Thursday, we get the weekly reading on jobless claims, followed by productivity and costs and international trade on Friday.

    What to Watch
    The strong close Friday and for the week has taken the S&P 500 up to my target zone of 1,500 to 1,520.

    The "Wall of Worry" that faced the market in early January has disappeared, but still the market remains very resilient. A two-day correction is the most we have seen. The jobs report could have been a catalyst for a sharper pullback, but there is little in the way of regular reports to worry about this week.

    According to AAII, the bullish sentiment of individual investors backed off a bit last week, dropping to 48% from 52.3% the prior week. The percentage of bears was unchanged. The number of bullish financial newsletter writers rose slightly to 54.3%, with the bears unchanged at 22.3%.

    I continue to be cautious at current levels. In last week's update of the Charts in Play Portfolio, I gave several more levels for suggested profit taking in individual stocks. Now more than ever, I hope that you will pay attention to the 5 Rules for Success in 2013, with particular attention paid to the entry level and risk on any new positions.

    I continue to find a number of stocks that have are just coming out of four-to-six-week trading ranges where the risk can be well controlled. There are not nearly as many now as there were six weeks ago.

    From Friday's analysis of the large, mid-cap, and small-cap ETFs, it does appear that the mid-cap stocks are taking over leadership from the small caps. Therefore, this is one area I will be looking at for new opportunities. I also pointed out that the overall market had not given any sell signals, and Friday's action certainly did not change this view..

    The weekly chart of the NYSE Composite goes back to 2004, and shows the bullish divergence in the weekly Advance/Decline line at the March 2009 low. The weekly trading channel goes back to 2011, with the upper boundary (line a) now at 9,492. This is about 6% above current levels

    Click to Enlarge

    There is also resistance from 2008 at 9,694. One can also see that prices are well above the rising 20-week EMA at 8,444, consistent with an overbought market. This week, the Starc+ band will be at 9,106. The rising 20-day EMA is at 8840 and represents the first real daily support, with additional chart support in the 8674-8740 area.

    The long-term view of the NYSE Advance/Decline shows that it is acting much stronger than prices, as it is already well above the highs made in 2007-2008, even though prices are not. More importantly, it shows a clear pattern of higher highs (line c). It has recently also broken out of its trading range.

    The long-term uptrend (line d), is derived from the multiple bullish divergences that formed at the March 2009 lows. Neither the weekly nor daily A/D line shows any signs yet of a top.

    Click to Enlarge

    S&P 500
    The Spyder Trust (SPY) stalled for a few days at $150.70, which was the equality target, but surged higher last Friday to $151.57.. The longer-term trend line resistance (line e) is now at $153.12, with the quarterly R2 resistance at $155.10.

    The S&P 500 Advance/Decline line, like the price action, shows a very sharp uptrend, with new highs again on Friday. This does allow for further price gains over the next week or two.

    There is minor chart support now at $149.60, which was last Thursday's low, with the 20-day EMA at $148.22. This is about 2% below Friday's close. There is further support at $146.52 to $147.30.

    Dow Industrials
    The SPDR Diamond Trust (DIA) came very close to the $140 level last week, and closed well above the quarterly R1 resistance at $138.80. The trend line that connects the May and September 2012 highs (line d) is now being tested.

    The weekly Starc+ band is at $141.50, with the monthly at $147.92.

    The Dow Industrials A/D line broke out new highs last week as resistance (line f) was overcome. It came close to its WMA last week, and has once again turned higher.

    There is first support now at $137.50 to $138, with the rising 20-day EMA at $136.61.

    Click to Enlarge

    The PowerShares QQQ Trust (QQQ) has been locked in a fairly tight range for most of 2013. It has tested its 20-day EMA several times over the past two weeks. The quarterly pivot at $66.10 has been holding.

    Friday's action was a bit more positive, but there is still strong resistance at $68.32. It would take a close above the early October high at $69.80 to get the market's attention.

    The Nasdaq-100 A/D line has continued to improve. After breaking through its resistance (line b), it pulled back to its rising WMA before turning higher. This is a bullish formation.

    The 20-day EMA is now at $66.86, and has not changed much in the past week.

    Russell 2000
    The iShares Russell 2000 Index (IWM) retested the breakout level (line c) last week before surging to new highs. Both the equality target (calculated from the November low to the December high) and the quarterly R1 are in the $90.45 to $90.60 area, which is where IWM closed. The quarterly R2 resistance follows at $94.06.

    The Russell 2000 A/D line has overcome stronger resistance (line e) that goes back to April 2012, and has also turned up from its WMA. It looks quite strong.

    There is support for IWM now at $88.60 (line c), and the rising 20-day EMA is at $88.32.

    NEXT: Sector Focus, Commodites, and Tom's Outlook

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: SPY, DIA, IWM, XLV, GLD, QQQ
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