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Chaikin Market Insights - April 13, 2014


Chaikin Market Insights - April 13, 2014

Bubble in Tech … or Not, Weakness Spells Trouble Ahead for Stock Market

The S&P 500 Index closed at 1,815.69, down 2.65% on the week. The stock market was weak in the face of favorable economic reports…never an encouraging sign. After an initially positive response to Thursday's jobless claims report, the market headed sharply lower led by continuing weakness in the biotech, internet and high momentum software stocks. Thursday closed below the closely watched 50 day average price and under the bottom of the trading range between 1,840 and 1,800. Friday saw more selling in the S&P 500 Index, the Nasdaq and the Russell 2000 small cap Index.

It has been our mantra over the past 2 ½ years that to know how you should position your portfolio you need to do two things: Listen to the Fed and watch the market. The Federal Reserve Board has been telling us for months that they will taper the bond purchases, which is the market's equivalent of a B-12 shot, and should wind down to zero by year end.

The market has been telling us for the past 3 weeks to be careful. How do we know that? There are a number of signs in the market's action which signal caution:

Fewer stocks participating as the market made new highs at 1,900 A significant breakdown in the market leaders; Biotech and Internet Software and Services Strength in the defensive Utility, Energy and Beverage groups

The fact that the market has declined 4% without an apparent reason other than profit taking is disturbing. The relative strength of the European and emerging markets, the retreat to defensive stocks and the market's break below support levels suggest that a larger decline lies ahead.

Where are we headed and how will earnings reports impact the market?

The stock market is now trading below support with a likely bounce early this week from the 1,800 level; which would be a 5% pullback on the S&P 500 Index from its recent peak of 1,898. However, the damage to stock prices has been far more severe with the average stock in the S&P down 10.9% from its high and the average small cap stock down 17.2% from its 52 week high.

We should see a rally attempt off the 1,800 level which will quickly run into resistance at 1,835 - 1,850. The impact of 1st quarter earnings reports and more significantly the forward guidance which accompanies them will impact stock prices in a major way. If a rally fails at resistance near 1,840 or even worse fails to rally and breaks below 1,800, then the downside risk is to the 200 day average at 1,760 or a test of the February lows at 1,735. A 10% decline, which is long overdue, would take us to 1,700.

We view any rallies from here, whether to 1,840 or a breakout above that level to 1,900, as selling opportunities. Stocks with bearish Chaikin Power Gauge ratings are to be avoided at all costs. Last week we highlighted 13 stocks to avoid in the high flying social media, internet and software space. These stocks were down an average of 5.28% vs. the S&P 500 off 2.65%.

Eight Stocks to Avoid

The following 8 stocks should be avoided based on a bearish Power Gauge rating and poor technical performance:

3D Systems (NYSE:DDD)
LinkedIn (NYSE:LNKD)
Rackspace (NYSE:RAX)
Stratasys (NASDAQ:SSYS)
Trulia (TRLA)
Zillow (NASDAQ:Z)

If you own any of these stocks use short-term rallies to sell these vulnerable high fliers and stay in cash or look for bargains in stocks with bullish Chaikin Power Gauge ratings and solid earnings and valuation metrics.

Weekly Sector and Select SPDR ETF Update

Strength continued last week in the Utility ETF, (NYSEARCA:XLU), and in the Select SPDR Energy ETF, (NYSEARCA:XLE). However, as one of our favorite market observers, Bespoke Investment Group points out, strength in the Utility group when juxtaposed against the type of liquidation we are seeing in high momentum stocks is not a good omen for the stock market as a whole.

In our view a defensive posture is warranted with bargain hunting appropriate only on extreme market weakness (we have been oversold for weeks now in Biotech and Internet stocks) in sectors and groups with strong Power Gauge stocks. As there are only 59 stocks in the S&P 500 Index with bullish Power Gauge ratings, many of them Utility stocks, there is a strong likelihood of lower prices ahead after a short-term bounce.

For speculative buyers, the better quality Biotech stocks such as Amgen (NASDAQ:AMGN), Biogen Idec (NASDAQ:BIIB) and Celgene (NASDAQ:CELG) are good candidates on the next spike down.

2014 Model Portfolio Update

Better earnings and slightly better guidance, as suggested last week, did indeed lift shares of iGate (NASDAQ:IGTE), the Indian software and consulting company which guided lower in January. The stock was up 16% on Thursday after reporting better than expected earnings while the Nasdaq was down over 3%. iGate finished the week at 36.40 - up 14.75%.

There may be buying opportunities in many of the stocks in our 2014 Model Portfolio if the market absorbs additional selling - even though the Power Gauge ratings read Neutral+. This rating means bullish underlying factors but a stock in a well defined downtrend. We will identify these deep oversold buy points as they occur.

To read more of Marc's Weekly Insights, visit