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Chaikin Market Insights - July 19, 2014

Chaikin Market Insights - July 19, 2014

2nd Quarter Earnings are Stellar but Stock Market Stalls Below S&P 2,000 Level

The S&P 500 Index closed at 1,978.22, up 0.54% on the week. The stock market was a mixed bag for investors last week, with the S&P 500 and the Nasdaq Composite posting gains while the Russell 2000 small cap Index was down 0.46%. Janet Yellen's testimony before Congress and the Fed's monetary report which highlighted excessive valuations in small cap biotech and social media stocks contributed to the decline in the Russell 2000. I should point out that the overvaluation in social media and internet stocks is not just limited to small cap names as Linkedin, Yahoo and Pandora continue to trade poorly.

Geopolitcal events in Gaza and the Ukraine triggered a 1% sell-off in the S&P 500 on Thursday, the first move of that proportion in either direction in over 50 trading days. Friday saw the market regain its footing with a gain of 1% and a strong finish to the week. There is clearly a continued appetite for large cap U.S. equities as there is strong demand for stocks on any declines. This is supported by solid earnings reports from companies such as Alcoa, Honeywell, Intel, Goldman Sachs, Morgan Stanley, JPMorgan, Unitedhealth Group and even unloved IBM which showed signs of an impending improvement in revenue.

Of interest to bond investors is a Wall Street Journal story which points out that China has increased its holdings of short term U.S. Treasury securities by $107 billion in 2014. This has helped weaken the Chinese Yuan and helps to explain the unexpected strength in the U.S. Government bond market.

The Chaikin Power Bars for the major Indexes confirm the relative strength in the S&P 500 Index and the Nasdaq Composite and the weakness in the Russell 2000 small cap Index, where there are only 299 bullish Power Gauge stocks vs. 423 bearish ones. We will monitor this ratio closely for signs of a turnaround in the small caps.

(Power Bars from Chaikin Analytics)

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