For the first two weeks of the expiration month, SPY has fallen by 5.6%. In only one month in 2009 did it fall by that much (February was down 6.5% for the entire month). Over the last two weeks, GDX was down a whopping 14.7%, and Mosaic (MOS) fell 13.5%.
History has taught use that these large drops are highly likely to be reversed. Reversion to the mean is a much more powerful force than just about anything else in the market. We have seen it occur month after month for several years.
Experience has told us that refraining from adjusting too quickly has historically been the far more profitable alternative. The downside of that tactic will be to endure a very bad month every once in a while. The upside is that we should enjoy a large number of double-digit monthly gains over the course of the year.
For the second week in a row, the technical indicators are calling for higher prices. Earnings have generally been higher than expectations (except for a few tech companies) and the ISM factory index in January hit its highest level since Aug. 2004,so the fundamentals also support higher prices. But the market is essentially driven by emotion in the short run, and there is no way of reliably predicting the composite market emotion (consumer confidence measures hit a recent high this week, contrary to the market, for example).
I wrote the above words to Terry's Tips Insiders in last week's Saturday Report to explain why we did not make a single adjustment trade during the week while the market fell. Our patience was rewarded on Monday when the market made a strong reversal, going up by a greater amount than it had fallen on Friday. Portfolio values soared as could be expected.
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The market ended a disappointing January with a sharp loss as market participants questioned whether the U.S. economy could sustain its large 4th quarter growth rate. Furthermore, poor earnings in the technology sector left the market wary which led to sharp declines in the high beta arena.
Following last week's sharp sell-off, Thursday and Friday's sharp declines left the U.S. equity markets lower for a third consecutive week.
January was the worst month for the market since February 2009. Quite a few market participants follow the January barometer which states that the first month o the year sets the tone for the stock market for the rest of the year. According to the Stock Trader's Almanac, since 1950, the S&P 500 full-year direction has matched its January performance more than 90% of the time. However, the January barometer can be wrong. Take for instance last year, the market experienced its worst January ever with the Dow losing 11.4% and as we all know the Dow went on to reap an 18.8% gain for 2009.
The two day decline to end the week came on the heels of a weaker than expected Initial Jobless Claims report. Seasonally adjusted advance initial unemployment claims fell 8,000 to 470,000 in the week ended Jan. 23, the Department of Labor reported.
"The numbers we've seen so far suggest there is a reduction in layoffs and firing, but not a pickup in hiring," Laurenti said. "The economic recovery is in paper, but people don't see changes in real life. We expect this will be the case for a while. It won't be until the second half of 2010 that [employment] will begin to improve, but not as fast as it did in previous recessions."
The market attempted to rebound Friday morning as the Q4 GDP report came in at 5.7% vs. a consensus of 4.8%.
Kathy Bostjancic, a senior economic advisor at the Conference Board in New York, state, "It's a nice improvement compared to the depths of the recession," she said of the Commerce report. "But still, these [data] are not indicating that businesses are at a point where they are going to let up on the spending reins and do a lot of meaningful hires."
"The key question for the U.S. economy is the consumer," she said, adding that people's spending power is weighted down by big debt loads, tight credit, and - more significantly - worry about employment.
"It will come down to jobs and income," she said
The bullish attempt quickly failed on Friday after the Fed Vice Chairman stated, "The response of interest rates across the maturity spectrum to an actual or expected tightening of monetary policy is always hard to predict, but is especially so in current circumstances," Kohn said in a speech at a Federal Deposit Insurance Corp. symposium on interest-rate risk management.
The situation makes it imperative for all parties to show caution, Kohn said, explaining:
"The usual uncertainty about changes in policy interest rates is compounded by uncertainties related to the possible special effects of the historically low level of interest rates in the current recession, as well as the unprecedented increases in the size of the Federal Reserve's balance sheet and bank reserves as a result of our credit programs and large-scale asset purchases."
On the technical front, we are in a similar situation to last week although the probability of a bounce has increased tremendously. Most of the major indices have pushed into a short-term 'very oversold' state as well as most of the companies we follow in the Shoot Strategy portfolio. This obviously bodes well for the bulls at least on a probability basis. Typically when the market moves into the depths of a 'very oversold' extreme market participants use the level as an area to round up some buying interest. I think next week will be no different, at least over the next 1-3 trading days.
Andy
Overbought/Oversold as of February 2, 2010
Major Benchmarks