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Chaikin Market Insights - March 29, 2014

|Includes:AMGN, BIIB, XBI, XLE, XLF, XLK, Utilities Select Sector SPDR ETF (XLU), XLV

High Fliers Take Flack but Stock Market Holds Up

Well Under the Pressure The S&P 500 Index closed at 1,857.62, down 0.5 % on the week. The stock market has spent the last 4 weeks in a trading range between 1,830 and 1,880. The failure, after many attempts, to close above 1,876 has led to declines toward the lower end of the trading range. Strong support still exists in the 1,835 - 1,855 area.

There has been a rapid shift away from growth stocks in general and Biotech and Internet related stocks specifically. This has put pressure on the Nasdaq 100 Index as well as the Russell 2000 small cap Index. The S&P 500 Index and the Dow Jones Industrial Average (which has been genetically engineered to irrelevant) have held up rather well.

The big question on investor's minds is whether this shift away from the growth stocks which led the market to new highs is a harbinger of a general downturn. In normal times when the Federal Reserve Board is not keeping short-term rates artificially low, there would be signposts to help us but that is not the case now.

The answer to whether the market has more to go on the upside lies in the economic statistics which will be reported over the next 3 weeks and the 1st quarter earnings reports and corporate guidance which accompanies them. As these earnings reports begin to give us a picture of the strength or weakness of the U.S. economy for the balance of 2014, the market will tell us what lies ahead for stock prices.

Where are we headed and what sectors will lead the stock market?

Support in the 1,835 - 1,855 area held last week and we are now entering the very favorable April time period. It is still my expectation that we will see higher stock prices ahead of the 1st quarter earnings reports due out in mid - April. However, these new highs if we see them will be short-lived if the company guidance which accompanies the earnings reports is not encouraging. The EPS reports themselves may reflect weather-related diminished economic activity but guidance from corporations will be fresh data for the markets.

In line with our January advice to stay nimble in 2014, we view these moves within this trading range as short-term opportunities. The bigger picture should become clear shortly. If in fact the shift away from growth-oriented internet and biotech stocks is merely part of a sector rotation towards economically sensitive stocks which would benefit from a pickup in the global economy, then we will recommend staying the course. If instead the market reacts badly to the reports due out in the next 3 - 5 weeks, the sharp sell-offs in these high fliers is a warning of the type of volatile declines which would follow.

Our advice last week to buy the biotech stocks on pullbacks was clearly premature as they continued lower this past week. However, as we point out below, they have gotten so oversold that a retracement bounce is now likely.

Weekly Sector and Select SPDR ETF Update

Strength continued last week in the Utility ETF (NYSEARCA:XLU) which was joined as by the Select SPDR Energy ETF (NYSEARCA:XLE) as the 2 best performing sectors. Longer term the Financial (NYSEARCA:XLF), Technology (NYSEARCA:XLK) and Healthcare (NYSEARCA:XLV) SPDR ETFs continue to lead the pack.

There was a report on Bloomberg News of major outflows from Healthcare ETFs which is not surprising considering the extreme weakness in the biotech stocks. This extreme weakness was reflected by the SPDR Biotech ETF (NYSEARCA:XBI) retracing 50% of its gains from the June lows. In the past such extreme weakness has led to a sharp rally over the next 2-4 weeks of as much as 10-15%. Based on that historic precedent I would be a buyer of both leading biotech stocks such as Amgen (NASDAQ:AMGN) and Biogen Idec (NASDAQ:BIIB) as well as the XBI and the IBB ETFs. This may only be a trading bounce which retraces 50% of the decline but it should be quick and sharp if it comes.

This Week's Earnings Reports

It is another very light week for earnings reports which means the markets will focus more on a spate of economic reports due out in the coming week. Tuesday's ISM manufacturing index report will be a market mover as will the non-farm payroll report due out on Friday. On Thursday morning, the European Central Bank (ECB) will release its monthly policy decision. There is some speculation that they may step in and buy government bonds. This would be a positive move for the stock market and the European economic growth picture as well.

Get this week's full Market Insights at here.