Lately I have cautioned investors to remain vigilant for a possible correction. So far the corrections to date have been contained in the 5% area..
Are we in for correction here as we attempt to reach a new high thus continuing our "1995" thesis of no corrections greater than 5% ? Or do we fail here, form a double top and have a more meaningful pullback . Next week may provide a key and here is some evidence to support further strength.
Earnings in 2013 are expected to make new all-time highs. This week, same-store-sales came in at their best level since January, and new foreclosures are at their lowest levels since 2005, suggesting the economy is indeed turning up. Jobs and consumer confidence have both steadily improved in recent months as well. Things aren't perfect, sure, but the economy looks good and the amount of fear we see on pullbacks is actually very welcome -- that is how bottoms (not tops) form, and we've been seeing it for quite a while now.
Another potential positive is that the expectation levels are too low for second-quarter earnings. At the start of the year, the average prediction for quarterly earnings growth was 9%, before dropping to 7% by April.
Now, the consensus growth target sits at less than 1%. Still, earnings should beat the estimates, but the guidance is going to be more important. Keep your eyes on that as we start seeing more reports.
Regarding sentiment, short interest continues to tick higher. Short interest on S&P 500 component stocks is up near its highs for 2013.
Also, it is up 7.44% since early February, while the SPX has gained more than 10%.
So, as the market goes higher, more shorts continue to increase their bearish bets. This could imply more demand via short-covering.
Also note that the number of bears in the Investors Intelligence (II) poll actually jumped 10% over the past week, while the Russell just broke out to new highs. The market goes higher and the bears get more aggressive. Hmmmm.
Now the weekly poll from the National Association of Active Investment Managers (NAAIM), which asks money managers to provide a number that represents their overall equity exposure as of Wednesday's close each week. The latest poll showed managers outright panicked on the recent 5% drop. This ratio was way beneath the November lows and in line with the major buying opportunity of last June. Their is a lot of potential cash on the sidelines to come in before these guys are fully invested again.
Now, everything isn't perfect. "Once everyone is on margin, they are fully invested." So just the smallest selling could lead to more selling as margin calls jump. We are now at very high levels in margin debt.
The NASDAQ Composite broke out from a basing pattern that had been in place for 12 years , and this moved the NASDAQ into a new secular bull market. Joining the S & P and Dow. Since the breakout, pullbacks in the NASDAQ have held the breakout point in the 2700 area. Not guaranteed, but, there is eventual upside potential to the rising channel resistance in the 3800-4000 area.
Fundamentally, European trade is achieving balance, proving the doomster's wrong according to Olaf Storbeck at Breakingviews. He writes, "The latest German trade data confirm that one of the fundamental causes of the euro crisis may be fading away. The long- standing intra-euro zone trade and current account imbalances are disappearing slowly but surely. In short , Europe is improving .
What does all of this mean ? . I for one do not think I am nimble enough to trade for what may be a small upside here with the presence of a technical pattern (double top) that looms large.
For the conservative investor, you can buy stocks with a reasonable yield, attractive valuation, and a strong balance sheet. You can then sell near-term calls against your position and target returns close to 10%. The risk is far lower than for a general stock portfolio. This strategy has worked well , and will work if in fact we go into a sideways market for a while.
In addition to selling calls on your "core" dividend positions, I like to allocate a certain percentage to call writing on stocks that I "like" to simply buy and write the simultaneous call for good income.
Here is a link to my latest positions
Lets see what develops this week vis a vis a potential challenge to the all time highs and go from there..