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Chaikin Market Insights - May 18, 2014

S&P 500 Traded Above 1,900 but Sellers Rejected That Key Price Level

The S&P 500 Index closed at 1,877.86, virtually unchanged on the week. A late day rally in the Nasdaq Composite Index of 1% averted a potential break down below its 200 day average. We remain in a bifurcated market environment, with the Russell 2000 small cap Index below its 200 day average and down 10% from its high, while the S&P 500 is making repeated attempts to break out to new all-time highs above resistance at 1,900.

While Friday's bounce in both the small cap and high flying Nasdaq stocks is welcome, it is hard to view this as anything more than short covering with some bargain-hunting thrown in for good measure.

The internal Power Gauge breadth for the major Indexes remains poor with the S&P 500 Index showing the best readings with a tepid 93 bullish ratings vs. 102 bearish ones. The Nasdaq 100 reading is 10 bullish and 34 bearish, while the Russell 2000 has 280 bullish vs. 481 bearish. All as of Thursday's close.

Power Bars from Chaikin Analytics

Only time will determine whether the large cap, value and yield oriented stocks will succumb to the selling pressure which has been evident in the more speculative sectors in the market. It is possible that the demand for quality U.S. equities is strong enough that the S&P 500 escapes with the minimal declines we have seen up until now. With U.S. 10 year government bond yields under 2.5%, the yields on high quality stocks are compelling … unless the bond market senses something about a weakening economy that stock investors are failing to acknowledge.

The growing chorus of bearish voices coming from serious and successful hedge fund and private equity investors like Leon Cooperman, David Tepper and David Rubenstein of the Carlyle Group, as well as from technical analysts like Ralph Acampora and John Mendelson, adds weight to the bearish argument.

Last week we commented that "What we are seeing is a continuing shift from growth and high momentum stocks to value and higher yield stocks.

The likelihood is continued underperformance in the small cap sector, particularly the small cap growth stocks, with money flowing into large cap value oriented stocks. In this environment the S&P 500 could go to nominal new highs while the laggard segments of the market have tepid, reflex rallies."

Not much has changed to move us away from that view and thus we continue to recommend staying cautious, raising cash on rallies and avoiding bearish Power Gauge stocks.

ETF Sector Update

Even with this week's profit taking in certain Utility and Energy stocks, the SPDR Energy ETF (NYSEARCA:XLE), and the SPDR Utility ETF (NYSEARCA:XLU) continue to rank best amongst the S&P Select SPYDER ETFs. I would continue to avoid the XLY Consumer Discretionary Sector ETF as well as the S&P Retail (NYSEARCA:XRT) and the S&P Home Builder (NYSEARCA:XHB) ETFs.

Why is the Stock Market so Volatile of Late?

The stock market is caught between two points of view about the economy. One is driven by the unexpectedly strong bond market, which suggests a weaker economic outlook for the balance of 2014. The other is based on the generally strong employment and jobless claims numbers which suggest an improving economy. This has been complicated by the harsh winter weather which curtailed economic activity and the relatively poor housing numbers for new single-family home construction, which so often drives economic growth.

Bulls are hanging their hats on a strong 4th quarter economy, which may indeed come to pass. Bears, on the other hand, and some of the stock market optimists are looking for the weakness in the small cap and high momentum stocks to spill over into the blue chips. If this happens, the S&P 500 could easily have a 10% correction down to 1,700 before a 4th quarter rally were to take place.

To read more of Marc's Weekly Insights, visit https://www.chaikinpowertools.com/market-insights.shtml.