Chaikin Market Insights - June 16, 2014 Stock Market Runs into Mild Profit Taking
The S&P 500 Index closed at 1,936.16 down 0.68% % on the week. The S&P 500 Index made a new all-time high before selling off mildly for three days and rallying on Friday.
The decline was attributed to any number of factors such as the defeat of conservative Republican representative Eric Cantor by a Tea Party challenger in Virginia, the World Bank's lower growth projections for both the U.S. and the global economy, and the heightening conflict in Iraq which caused the price of crude oil to spike higher.
All of this misses the point. Markets move up or down when the forces of supply and demand get exhausted and reverse, which may be happening now. We should certainly see a decline to 1,900-1,920 before the market attempts to rally. We will then be able to gauge how much gas is left in the stock market's tank.
Although takeovers at premium prices like Merck's bid for Idenix and Priceline's bid for Open Table create the appearance of a bull market, they are really a function of the Fed-eral Reserve Boards QE policy in action. Liquidity injections from the Fed have not boosted the economy but have merely served to facilitate corporate acquisitions instead.
The Federal Reserve Board's open market committee statement which will be released on Wednesday will provide an insight into where Janet Yellin and the Fed see the economy headed and when we might expect the first uptick in interest rates. The market risk is in Fed expectations of stronger economic growth and an earlier uptick in interest rates. That risk is real and would push the market down through 1,900 toward a full blown and un-expected 10% decline in the broad market.
Maintain a cautious stance regarding short-term market prospects and see how the Fed statement influences the market. Low volatility may encourage equity investments, but complacency is dangerous and never a good sign for stock prices.
ETF Sector Update
Energy, Finance, and Health Care Select SPDR ETFs continue to lead the market, while Consumer Discretionary and Consumer Staples continue to lag. A disappointing retail sales report confirms the underlying reason why these two sectors are performing badly and any increase in the price of gasoline will only makes matters worse.
Portfolio Strategy in the Current Market Environment
Avoid bearish Chaikin Power Gauge stocks and monitor stocks like Southwest Air-lines (LUV) and Hewlett Packard (HPQ) with bullish Power Gauge ratings for over-sold entry points.
To read more of Marc's Weekly Insights, visit https://www.chaikinpowertools.com/market-insights.shtml.