With 2014 off to a lackluster start, investors need to consider whether they should take action to avoid a likely sell-off. A Pullback is Not a Sell Signal On the first trading day of the year, SPDR S&P 500 (NYSE: SPY) fell 0.96% and extended its loss with a small decline on Friday. For the week, SPY fell 0.51%. The two-day sell-off at the end of the week was not a very significant event, but in a search for new indicators, some commentators are trying to compress the January Barometer into an… Read More

With 2014 off to a lackluster start, investors need to consider whether they should take action to avoid a likely sell-off. A Pullback is Not a Sell Signal On the first trading day of the year, SPDR S&P 500 (NYSE: SPY) fell 0.96% and extended its loss with a small decline on Friday. For the week, SPY fell 0.51%. The two-day sell-off at the end of the week was not a very significant event, but in a search for new indicators, some commentators are trying to compress the January Barometer into an ever shorter time frame.#-ad_banner-#​ The January Barometer claims that the market will end the year up if the S&P 500 moves up in January. A lower close for the index in January is bearish for the full year. Several years ago, a widely admired technical analyst, Louise Yamada, CMT, revealed she had found a way to improve the January Barometer. She told The New York Times that when there is a gain in the first five trading days of January and a further climb through the end of the month, “there is a 94% chance of the market being up… Read More

By the time the U.S. budget deficit reached $1.4 trillion in fiscal (October) 2009, alarm bells were sounding everywhere. Unless the government could get its fiscal house in order, the future promised years of misery as the U.S. kowtowed to its bondholders in China, Japan and elsewhere. But this crisis simply never came to pass. Thanks to a range of factors for which both political parties can take some credit, the budget gap has already narrowed sharply. According to the Congressional Budget Office (CBO), the budget deficit will fall even further in fiscal 2014 and 2015. A Fast-Shrinking Deficit… Read More

By the time the U.S. budget deficit reached $1.4 trillion in fiscal (October) 2009, alarm bells were sounding everywhere. Unless the government could get its fiscal house in order, the future promised years of misery as the U.S. kowtowed to its bondholders in China, Japan and elsewhere. But this crisis simply never came to pass. Thanks to a range of factors for which both political parties can take some credit, the budget gap has already narrowed sharply. According to the Congressional Budget Office (CBO), the budget deficit will fall even further in fiscal 2014 and 2015. A Fast-Shrinking Deficit In another bit of good news, the recent era of very low interest rates has enabled Uncle Sam to keep interest payments in check. Five years ago, the government was paying a roughly 4% interest rate on its debt. That figure has fallen by more than 150 basis points since then. *CBO estimate #-ad_banner-#The net result of the drop in interest rates: Uncle Sam has saved nearly $200 billion in annual interest expense (in light of the growing total debt since then and assuming interest rates had stayed constant at 2008 levels). The tougher… Read More

Seasonality is bullish for gold but bearish for stocks. The outlook for gold is confirmed by more traditional indicators and could provide one of the best trading opportunities in the next few months. Seasonals Favor Lower Prices SPDR S&P 500 (NYSE: SPY) gained 1.26% last week and is now up 31.71% in 2013.#-ad_banner-#​ Seasonals indicate the market could be due for a pullback. There are seasonal trends in almost all markets, and these indicators work with varying degrees of effectiveness. Traders should not base buy and sell decisions solely on seasonals, but… Read More

Seasonality is bullish for gold but bearish for stocks. The outlook for gold is confirmed by more traditional indicators and could provide one of the best trading opportunities in the next few months. Seasonals Favor Lower Prices SPDR S&P 500 (NYSE: SPY) gained 1.26% last week and is now up 31.71% in 2013.#-ad_banner-#​ Seasonals indicate the market could be due for a pullback. There are seasonal trends in almost all markets, and these indicators work with varying degrees of effectiveness. Traders should not base buy and sell decisions solely on seasonals, but they are a factor to consider. While the idea of seasonal tendencies might not be widely followed, they can be profitable as the popular “sell in May and go away” rule often is. The chart below shows the seasonal pattern for SPY. This indicator uses all of the available history and shows how the ETF has done, on average, on any given day. If history repeats, the year-end rally in the stock market could stall as seasonals point toward a flat market with some downside risks for the next three months. Seasonals are known in advance, and the… Read More

Investors in small-cap stocks have rarely had it this good. The Russell 2000, which stood below 400 in early 2009, is quickly approaching the 1,200 mark.  It’s as though two decades worth of gains have been packed into just five years. The small-cap surge shouldn’t have come as a total surprise. As I noted on our sister site InvestingAnswers.com a few years ago, small-cap stocks often outperform large-cap stocks when the overall economy is coming out of a recession. Post-Recession Performance (prior to 2009) Yet as we turn the page and head into… Read More

Investors in small-cap stocks have rarely had it this good. The Russell 2000, which stood below 400 in early 2009, is quickly approaching the 1,200 mark.  It’s as though two decades worth of gains have been packed into just five years. The small-cap surge shouldn’t have come as a total surprise. As I noted on our sister site InvestingAnswers.com a few years ago, small-cap stocks often outperform large-cap stocks when the overall economy is coming out of a recession. Post-Recession Performance (prior to 2009) Yet as we turn the page and head into 2014, it’s crucial that you understand how a changing economy will influence this trend. For a host of factors, small caps are likely poised to underperform their large-cap peers.#-ad_banner-# In August, I explained why investors should shift assets into larger companies, and since then, the reasons for owning big-cap companies have only strengthened. First, the market has moved even higher since last August, with the Russell 2000 up another 9% and the S&P 500 Index rising another 8%. If investors are looking to lock in profits in 2014, then larger companies, especially those with robust buyback and dividend policies, are… Read More

In the 1930s, a financial editor at Forbes magazine pieced together chart patterns. Richard Schabacker, who is considered the father of technical analysis, went beyond identifying how patterns looked on charts. He also looked broadly at investor psychology and noticed that it could explain why some chart patterns form. Psychology can be a valuable tool for traders to understand. We have made some notes on the chart below that describe the feelings of some investors at various times during the past few years. #-ad_banner-#Investor psychology does help explain resistance on a chart, for example. After a bear market,… Read More

In the 1930s, a financial editor at Forbes magazine pieced together chart patterns. Richard Schabacker, who is considered the father of technical analysis, went beyond identifying how patterns looked on charts. He also looked broadly at investor psychology and noticed that it could explain why some chart patterns form. Psychology can be a valuable tool for traders to understand. We have made some notes on the chart below that describe the feelings of some investors at various times during the past few years. #-ad_banner-#Investor psychology does help explain resistance on a chart, for example. After a bear market, there will be some investors who will be thankful to recover their losses. They might sell when the market gets back to its old highs. This appears as resistance on the charts. After resistance is broken and prices start moving higher, we often see a market “melt-up” as investors rush in since they are worried about missing out on the upside. This is an oversimplification, but investor psychology does help us to understand a great deal about the market action. This idea was also recognized more than 100 years ago by Charles Dow, the creator of the Dow Jones Industrial… Read More

Short sellers are wrapping up another tough year, as a liquidity-fueled rally has helped to levitate even the most dubious business models.#-ad_banner-#​ Some short sellers have even thrown in the towel, noting that John Maynard Keynes’ maxim that “the market can stay irrational longer than you can stay solvent.” But signs are emerging that this losing approach to the market may finally be gaining traction. In recent weeks, a range of heavily-shorted stocks have indeed begun to move lower, which may be a sign that short selling will again be a useful component… Read More

Short sellers are wrapping up another tough year, as a liquidity-fueled rally has helped to levitate even the most dubious business models.#-ad_banner-#​ Some short sellers have even thrown in the towel, noting that John Maynard Keynes’ maxim that “the market can stay irrational longer than you can stay solvent.” But signs are emerging that this losing approach to the market may finally be gaining traction. In recent weeks, a range of heavily-shorted stocks have indeed begun to move lower, which may be a sign that short selling will again be a useful component of your broader portfolio strategy in 2014. If you are looking at potential short sale candidates, here are four that are in the targets of short sellers right now. 1. Bank of America (NYSE: BAC )​ Shares of this banking giant have rebounded more than 200% over the past two years. Joining its major banking peers, Bank of America finally trades back up above book value, taking away one of the lone pillars of value. That argues for muted upside in the year ahead. Yet it’s the downside risk that is coming into focus as well. In… Read More

Federal Reserve action gave stocks a short-term boost last week, but without additional news, trading volume is expected to be low through the holidays. Traders Cheer the Fed SPDR S&P 500 (NYSE: SPY) gained 1.94% last week after the Fed gave traders everything they seemed to want. Asset purchases will continue, but instead of buying $85 billion worth of bonds every month, the Fed will only be buying $75 billion a month starting next month.#-ad_banner-# The general expectation seems to be that there will be a gradual decrease in the purchase amount announced at future Fed meetings unless the… Read More

Federal Reserve action gave stocks a short-term boost last week, but without additional news, trading volume is expected to be low through the holidays. Traders Cheer the Fed SPDR S&P 500 (NYSE: SPY) gained 1.94% last week after the Fed gave traders everything they seemed to want. Asset purchases will continue, but instead of buying $85 billion worth of bonds every month, the Fed will only be buying $75 billion a month starting next month.#-ad_banner-# The general expectation seems to be that there will be a gradual decrease in the purchase amount announced at future Fed meetings unless the economy weakens. Even though the amount of the purchases will be smaller, the Fed should still be adding a significant amount of money to the economy through this program. Reducing purchases by $10 billion after every meeting would result in $460 billion in monetary stimulus to the economy next year. The Fed is a bullish factor for the stock market in 2014. However, earnings and economic growth will probably be the factors that determine how stocks actually do in the next year. For now, those factors are bullish and gains for the full year seem likely unless earnings disappoint or… Read More

Despite an impression that too many investors focus only on quarterly results, most investors assess a stock’s value on future trends. The notion that “the market looks ahead” is based on the idea that 2013 share prices reflect projected financial results in 2014 and 2015.#-ad_banner-# That’s the only way you can explain the stunning gains for casual dining stocks. Recently, they’ve been continually setting new all-time highs, even as consumer confidence and spending remain in a funk.  According to Deutsche Bank, this group of stocks trades for 24 times 2014 profits. That’s well above the five-year average of… Read More

Despite an impression that too many investors focus only on quarterly results, most investors assess a stock’s value on future trends. The notion that “the market looks ahead” is based on the idea that 2013 share prices reflect projected financial results in 2014 and 2015.#-ad_banner-# That’s the only way you can explain the stunning gains for casual dining stocks. Recently, they’ve been continually setting new all-time highs, even as consumer confidence and spending remain in a funk.  According to Deutsche Bank, this group of stocks trades for 24 times 2014 profits. That’s well above the five-year average of 18. “Our biggest concern heading into 2014 is that investors decide restaurant stocks are too expensive and seek out better values elsewhere,” Deutsche Bank’s analysts noted in a recent report. To my mind, such a rotation appears inevitable. Better Days Ahead? To be sure, restaurants are expected to benefit from falling agricultural prices. On an aggregated basis, these restaurant operators predict that their food costs will rise just 2% in 2014, which would be the lowest rate since 2010. “However, lower food inflation can be a double-edged sword to the extent this leads to heightened discounting,” note the Deutsche… Read More

The stock market saw little volatility last week, but pushed below a key support level. Now is a time to become cautious. Consolidation Could Be Giving Way to a Small Decline SPDR S&P 500 (NYSE: SPY) closed down for the second week in a row. SPY fell 1.56% as the market continued to consolidate its gains after an eight-week winning streak.#-ad_banner-#​ Traders understand that markets move up and down over time. On a long-term chart, we often see a recurring pattern of price rises followed by pullbacks. Pullbacks are healthy for a bull market because… Read More

The stock market saw little volatility last week, but pushed below a key support level. Now is a time to become cautious. Consolidation Could Be Giving Way to a Small Decline SPDR S&P 500 (NYSE: SPY) closed down for the second week in a row. SPY fell 1.56% as the market continued to consolidate its gains after an eight-week winning streak.#-ad_banner-#​ Traders understand that markets move up and down over time. On a long-term chart, we often see a recurring pattern of price rises followed by pullbacks. Pullbacks are healthy for a bull market because they allow the fundamentals to catch up to the price action. Since the purpose of a pullback in a bull market is to allow time for fundamentals to catch up to prices, a consolidation can substitute for a price decline. A consolidation is a period of time when prices make little progress to either the upside or the downside. Consolidations can be boring times for many traders, but we could be about to enter a more exciting time. After a one-month period of little price progress on the daily chart, we could be seeing a breakout to the downside. Read More

With just a couple of weeks left in the year, the stampeding bull is starting to wheeze.#-ad_banner-#​ Ever since investors celebrated the recent monthly employment report with a nearly 200-point surge in the Dow, the trading mood has turned darker. The market is fell roughly 2%  last week, the biggest weekly fall since mid-August. And even as the major indices still trade near their all-time highs, several technical indicators are flashing red. They may just be sign to tread with caution, or a harbinger of a broader market reversal. That’s why some leading traders suggest a tight grip… Read More

With just a couple of weeks left in the year, the stampeding bull is starting to wheeze.#-ad_banner-#​ Ever since investors celebrated the recent monthly employment report with a nearly 200-point surge in the Dow, the trading mood has turned darker. The market is fell roughly 2%  last week, the biggest weekly fall since mid-August. And even as the major indices still trade near their all-time highs, several technical indicators are flashing red. They may just be sign to tread with caution, or a harbinger of a broader market reversal. That’s why some leading traders suggest a tight grip on stop-loss orders. Placing a stop-loss limit order roughly 5% to 10% below current prices can provide a lot of peace of mind.   Here’s a closer look: 1. Surging New Lows ​ One of the most remarkable aspects of this year’s bull market has been its breadth. So many stocks have rallied, and only the absolute duds have fallen sharply. In fact, the number of stocks on the NYSE hitting new 52-week highs has handily outpaced the number of new lows all year long. But that’s changing. ​  On the Friday after Thanksgiving, new highs on the NYSE… Read More