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Chaikin Market Insights - April 27th, 2014


Market Rallies Back to Resistance Again…Guidance Improves but Stocks Sell Off

The S&P 500 Index closed at 1,863.40, down 0.1% on the week. The Nasdaq and the Russell 2000 small cap Index bore the brunt of the selling late in the week, closing off 0.49% and 1.31% respectively. Early in the week the market attempted and failed to penetrate its previous highs of 1,897 intra-day, and 1,891 on a closing basis.

After Amazon (NASDAQ:AMZN) sold off sharply in response to a disappointing earnings report on Thursday afternoon, and Facebook (NASDAQ:FB) didn't rally in the face of better than expected earnings, the technology and social media stocks again took in on the chin as investors took flight to the safer havens of utilities and more conservative value stocks. Even Apple's (NASDAQ:AAPL) 9% rally after their earnings report on Wednesday failed to spark a breakout in tech stocks or the stock market.

The stock market finished the week right on its closely watched 50 day average price of 1,863. As long as there is no further escalation in the Ukrainian situation, the market may attempt a bounce early in the week. It has been well publicized that 14 of 16 Tuesdays have seen an up stock market day in 2014, and that Fridays have been the market's downfall this year.

One new and troubling pattern is that for the first time in 2 ½ years there are more companies raising guidance than lowering it … but the market is not responding positively. In fact, the stock market traded higher for the past 2 ½ years in the face of lower guidance and now is doing the reverse.

There is an old adage in Wall Street that markets climb a wall of worry. The corollary is "beware of markets that don't rally on good news".

A second disturbing statistic is that the number of trades placed through 2 major discount brokers, E*Trade and TD Ameritrade are now accounting for 11 - 13% of all trades on the New York Stock Exchange. Clearly the public is back in the market in a big way. This combined with the poor performance of the glut of IPOs hitting the market suggests that sentiment has finally turned negative.

Sell in May and Go Away?

We have been suggesting caution since mid-April, based on recent seasonal weakness in the May-June time frame. Although we don't subscribe to the "sell in May and go away" thesis, there is ample evidence that shows the market performing significantly better on average in the November-April period than in the May-October time frame.

According to Sam Stovall, chief equity strategist at S&P's Capital IQ, in his book The Seven Rules of Wall Street, since 1945 through 2008, the S&P 500 has averaged a gain 6.8% in the November-April period but only a 1.1% advance from May-October. Except for 2009 when we were rallying from a collapse in 2008, the numbers have held up and more so.

There are two sectors, however, which have advanced in the May-October period, Health Care and Consumer Staples. Use the new ETF capability in Chaikin Analytics to monitor the Select SPDR Health Care ETF (NYSEARCA:XLV) and the SPDR Consumer Staples ETF (NYSEARCA:XLP) for potential entry points. You can also drill down to see the stocks in these Sectors with bullish Chaikin Power Gauge ratings.

Utility stocks (NYSEARCA:XLU) have led the market in 2014 but appear to be very overbought.

What Should I do Now in My Portfolio?

• Play defense!

• Eliminate bearish Power Gauge stocks

• Sell on strength

• Raise some cash to put to work if the market sells off 10%

The market has strong resistance at 1,885. Support exists in the 1,820 - 1,840 area but recent action suggests that this support may not hold. The shift from high fliers to defensive and value stocks may not just be group rotation as the market pundits are suggesting, but a precursor of a 10% + decline down to 1,720.

As the saying goes, "the light at the end of the tunnel may be an oncoming freight train".

To get a cogent analysis of the bearish case from a successful hedge fund manager, read the Barron's interview today with Douglas Kass of Seabreeze Partners Management. Be mindful that Doug has been bearish and wrong before in this bull market but has a very good long term track record.

Performance Recap of our 8 Stocks to Avoid

The following 8 stocks featured the past 2 weeks in Market Insights as stocks to avoid, plus our bearish stock of the week Splunk (NASDAQ:SPLK) averaged a 5.8% loss for the week vs. the Nasdaq which was down 0.49%.

• Amazon (AMZN)
• 3D Systems (NYSE:DDD)
• LinkedIn (NYSE:LNKD)
• Rackspace (NYSE:RAX)
• Splunk (SPLK)
• Stratasys (NASDAQ:SSYS)
• Trulia (TRLA)
• Yelp (NYSE:YELP)
• Zillow (NASDAQ:Z)

If these recommendations helped you avoid big losses or profit on the short-side, please refer us to a friend or colleague! Or tweet about it @MarcChaikin.

Where is Apple Heading From Here?

Shares of AAPL responded with a 9% jump on Thursday and Friday, to 571.94, after reporting better than expected sales and earnings, raising the dividend and the share buyback plan and announcing a 7/1 split. Normally a split means little for a company but in the case of Apple, a lower price could attract retail buyers and more importantly make APPL a candidate for inclusion in the Dow Jones Industrial Average. This often creates extra demand for a company's stock.

The Chaikin Power Gauge rating on AAPL turned bullish based on Thursday's upside price/volume price action as well as the positive earnings surprise. The question in investor's minds is whether Apple should be bought at current levels.

My answer is no. Past price performance in Apple's stock after a spike up like we saw this past week has been negative on balance over the next 4 weeks. Apple is now up at the double top formed in November/December and should experience a pullback, particularly if the market heads lower in May.

Look to buy Apple on an oversold buy signal in Chaikin Analytics or on a pullback under 540.

To read more of Marc's Weekly Insights, visit