The S&P Chop Fest And The 'Early Warning Signal'

by: Danny Riley

The S&P 500 index [^GSPC:SNP] is sending mixed signals with all the lower closes in the first five trading days of 2014. It may not be a good sign, but it doesn’t mean a bear market is coming.

Trader’s Almanac

According to Jeffrey Hirsch, friend and editor of the Stock Trader’s Almanac, the slow start doesn’t necessarily mean doom for the markets or a bullish halo, either. January is historically bullish for the stock market and generally sets the direction for the year. As the saying says, how January goes, so goes the year.

So with the S&P down four out of the last five the bears think they have the upper hand, but that’s not what we think. We know the S&P has not fallen 10 handles or more since Dec. 11 and currently we think that will continue to work in favor of the index, not against it.

“When the year starts out crappy,” says Hirsch, “it puts a damper on people’s outlook.”

That’s why the Almanac treats the first five days of trading as an “early warning signal.”

Since 1950, according to the Almanac, in the 23 years when the S&P 500 was down in its first five sessions, the large-company stock index finished up for the full year just 12 times, which equates to 50-50 odds that stocks will close higher in 2014. In contrast, following the 40 times the first five days were positive, the S&P 500 finished the year in the black 85% of the time, with an average annual gain of 13.6%.

Street guy’s viewpoint

I know there are a lot smarter people out there than I am. My tools are common sense and a lot of pattern recognition, and here is why the S&P is NOT going down right now.

The first part is what I keep showing you; it’s the simplest tool in the world. It’s called the daily net change. Get a good look at this: Dec 26 +7.3, Dec 27 +.10, Dec 30 -1.8, Dec 31+6.4, Jan 2 -14.5, Jan 3 -2.25, Jan 6 -4.8, Jan 7 +10.0, Jan 8 +1.8. These net changes are identical to all the other sideways-to-down pullbacks. This is clearly a “back and fill” pattern.

No. 2 reason why the S&P is not going down right now: yesterday’s 238,000 ADP job blowout. The higher number is prelude to Friday’s job number.

Lastly, there is the $2 billion bought on Tuesday and Wednesday’s closes.

The Asian markets closed mostly lower and in Europe 12 of 12 markets are trading higher across the board. Today’s economic calendar has the Payroll to Population, jobless claims, EIA natural gas report, 30-year bond auction, Esther George speaks, Fed balance sheet, Narayana Kocherlakota speaks. Not everyone is back at their desk but the buyers are back and new highs are on the way.

Our view

Last Friday the S&P closed at 1841.00 and as of this morning the E-mini S&P futures is trading 1837.50. This morning we have a few key economic reports and some Fed speak to get past, but after that we think the S&P may be setting up a retest of the current contract highs and S&P 1850 with another possible high on Friday.

Our view is there is still room on the upside but you may want to sell the better news come Friday morning. You take it from there …

  • In Asia, 8 of 11 markets closed lower: Shanghai Comp. -0.82%, Hang Seng -0.91%, Nikkei -1.50%
  • In Europe 12 of 12 markets are trading higher: DAX +0.32%, FTSE +0.19%
  • Morning headline: “S&P Futures Seen Lower Ahead Of Key US Data
  • Total volume: 1.33mil ESH and 8k SPH traded
  • Economic calendar: Chain store sales, Challenger job-cut report, Gallup Payroll to Population, jobless claims, EIA natural gas report, 30-year bond auction, Esther George speaks, Fed balance sheet, Narayana Kocherlakota speaks.
    • E-mini S&P 5001836.75+4.25 - +0.23%
    • Crude98.55-0.22 - -0.22%
    • Shanghai Composite0.00N/A - N/A
    • Hang Seng22787.33-209.26 - -0.91%
    • Nikkei 22515880.33-241.12 - -1.50%
    • DAX9512.82+14.98 - +0.16%
    • FTSE 1006723.10+1.32 - +0.02%
    • Euro1.3577

     The S&P chop fest and the early warning signal