Technical Talk: Time for a Correction?

by Don Vialoux, Tech Talk

Upcoming US Events for Today:

• Retail Sales for January will be released at 8:30am. The market expects a month-over-month increase of 0.1% versus an increase of 0.5% previous. Less Gas and Autos, the increase is expected to show 0.3% versus an increase of 0.6% previous.
• Import/Export Prices for January will be released at 8:30am. The market expects export prices to increase 0.3% versus a decline of 0.1%, on a month by month basis. Import prices are expected to increase of 0.8% versus a decline of 0.1% previous.
• Business Inventories for December will be released at 10:00am. The market expects a month-over-month increase of 0.3%, consistent with the previous report.
• Weekly Crude Inventories will be released at 10:30am.

Upcoming International Events for Today:

• Euro-Zone Industrial Production for December will be released at 5:00am EST. The market expects a year-over-year decline of 2.4% versus a decline of 3.7% previous.
• Bank of England Quarterly Inflation Report Press Conference at 5:30am EST.
• Japanese GDP for the Fourth Quarter will be released at 6:50pm EST. The market expects a annualized increase of 0.4% versus a decline of 3.5% previous.

The Markets

Markets finished marginally higher on Tuesday as investors positioned themselves ahead of the State of the Union Address on Tuesday night. The Dow Jones Industrial Average surpassed the psychologically important 14,000 level, which is within striking distance of the all-time high of 14,198. The NASDAQ, however, ended marginally lower, struggling at resistance of 3200. Weakness in Apple is culprit for the negative pressures on the Technology heavy index as the tech titan continues to show signs of struggle around its 20-day moving average. Shares of Apple have not moved above its 50-day moving average since September of last year, precisely when the new iPhone and iPad were launched. Technology is seasonally out of favour between now and April.

Investors are probably questioning as to when they should sell equities given the significant run-up over the past few months. Analysts are largely proclaiming that a correction is imminent with many selling equities, speculating a peak. For intermediate-term investors, there are a few indicators that may be of assistance to help make that “Sell” decision. The Percent of Stocks in the S&P 500 trading above 200-day moving averages is one indicator. Using the 50-day average line of the indicator has provided reliable buy and sell signals over recent history. When the percent of stocks trading above 200-day moving averages has itself traded above its 50-day moving average, a buy signal is typically triggered. Conversely, the opposite holds true for Sell signals. According to this, a buy signal was triggered at the end of November and the S&P 500 has gained well over 100 points since. As of yet, a sell signal is nowhere near. The 50-day moving average line continues to trend higher, just as the percentage of stocks trading above its key long-term average increases as well. This indicator will not allow investors to call a perfect top, no indicator can, but it does help in identifying significant momentum shifts that lead to changes in intermediate trend.

Other indicators are similar, using an indicator relative to a moving average of the indicator. The NYSE Advance-Decline volume line also produced a similar buy signal at the end of November as a 50-day moving average crossover was realized. Should it cross below, a sell signal may be implied. As of present, the indicator has yet to show signs of convergence with its 50-day moving average line.

Alternatively, using the relative position of the 4-week moving average compared to the 7-week moving average of stocks versus bonds (via the S&P 500 ETF – SPY and the Aggregate Bond Fund – AGG) has also provided buy and sell signals at very appropriate times over the past three years. As the 4-week average crosses above the 7-week, a buy signal is triggered, as it was in November of 2012. Conversely, when the shorter-term moving average crossed below the longer-term, a sell signal is generated. According to these indicators, sell signals have not been recorded and it remains pure speculation to expect the end of the present intermediate bull trend. These remain as simple tools within our technical tool-chest that can be used in combination with other indicators in order to derive definitive buy and sell signals for equity positions. Once a bearish crossover is realized, it will be reported on this site.

Companies reporting earnings today include Dean Foods, Deere & Co., Dr Pepper Snapple Group, Duke Energy Corp., Hospira Inc, Lorillard Inc, Sonoco, Agnico-Eagle Mines, Ltd, Applied Materials, Inc., CAI International Inc., CenturyLink, Inc., Cisco Systems, Inc., Intrepid Potash Inc, Kinross Gold Corp., Metlife Inc., Morningstar Inc, NetApp, NVIDIA Corp., Pioneer Natural Resources, Skechers U.S.A. Inc, Sun Life Financial Services, and Whole Foods Market Inc.

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