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

A strong gain after Friday’s jobs report failed to reverse four days of losses, and stocks were unable to deliver their ninth consecutive weekly gain. A Pullback Continues to be Likely After eight weeks of consecutive gains, SPDR S&P 500 ETF (NYSE: SPY) closed down 0.03% last week. The only up day was Friday, when SPY gained 1.12% after unemployment fell.#-ad_banner-#​ Traders’ reaction to the good jobs report is a little puzzling. The Federal Reserve originally said it would start tapering when unemployment fell… Read More

A strong gain after Friday’s jobs report failed to reverse four days of losses, and stocks were unable to deliver their ninth consecutive weekly gain. A Pullback Continues to be Likely After eight weeks of consecutive gains, SPDR S&P 500 ETF (NYSE: SPY) closed down 0.03% last week. The only up day was Friday, when SPY gained 1.12% after unemployment fell.#-ad_banner-#​ Traders’ reaction to the good jobs report is a little puzzling. The Federal Reserve originally said it would start tapering when unemployment fell to 7%, the level reached in the latest report. In addition to the drop in the headline number, the economy created more jobs than expected. A strong employment report could allow the Fed to begin tapering soon, and traders have sold on concerns about potential tapering in the past. The unemployment report is confirming a number of other data series that point to a stronger economy. Average hourly earnings increased and are now up 2.03% when compared to a year ago, higher than the rate of inflation. The number of people in the labor force also rose in November. The… Read More

The recent stock market pullback has sparked a bearish fever in many traders.#-ad_banner-#​ All the major indices have slipped lower, prompting the bears to start their dance of doom. While in my view, the selling is clearly nothing but short-term profit taking and not a signal of anything ominous, it doesn’t prevent the bearish fearmongers from dominating the financial media with nebulous terms like “overextended” and “overvalued.” I love it when the stock market bears crawl out of their caves. The louder they get about an imminent market crash, the more confident I become that it’s not going… Read More

The recent stock market pullback has sparked a bearish fever in many traders.#-ad_banner-#​ All the major indices have slipped lower, prompting the bears to start their dance of doom. While in my view, the selling is clearly nothing but short-term profit taking and not a signal of anything ominous, it doesn’t prevent the bearish fearmongers from dominating the financial media with nebulous terms like “overextended” and “overvalued.” I love it when the stock market bears crawl out of their caves. The louder they get about an imminent market crash, the more confident I become that it’s not going to happen anytime soon. These bears cite the risk of recession, the end of the Federal Reserve’s quantitative easing measures, weak corporate earnings and even China’s slowdown as the potential catalysts that will send stocks into the next bear market. The funny thing is, the more bears there are, the lower the likelihood of a crash or sharp correction taking place. The opposite also holds true.  When everyone is super bullish, that’s when it’s time to expect a market correction. Even the bears have a name for this phenomenon: climbing the “wall of worry.” Stocks are said to be climbing… Read More

Let the jockeying begin. Strategists are predicting a major change in interest rates in 2014 and 2015, and have already begun to identify the fallout — positive and negative — on a wide range of stocks. As long as you follow the game plan, your portfolio is likely to benefit.#-ad_banner-#​ There are two extremely likely scenarios for 2014. First, the Federal Reserve is expected to keep the federal funds rate near zero, which will keep interest rates on shorter-term lending rates very low. Second, the Fed will ease off its massive stimulus program (known as quantitative easing, or… Read More

Let the jockeying begin. Strategists are predicting a major change in interest rates in 2014 and 2015, and have already begun to identify the fallout — positive and negative — on a wide range of stocks. As long as you follow the game plan, your portfolio is likely to benefit.#-ad_banner-#​ There are two extremely likely scenarios for 2014. First, the Federal Reserve is expected to keep the federal funds rate near zero, which will keep interest rates on shorter-term lending rates very low. Second, the Fed will ease off its massive stimulus program (known as quantitative easing, or QE), which is likely to allow long-term rates to rise to levels that truly reflect global economic activity. (The QE program has kept a lid on long-term rates.) I discussed this notion a few weeks ago in my look at the soon-to-change yield curve. Historical trends suggest that certain sectors are likely to benefit while other sectors are likely to lose some appeal with investors. And even within sectors, clear winners and losers will emerge. Not All Yield Plays Are The Same First, let’s get the obvious impacts out of the way. Any income-producing investments such as utilities, real estate… Read More

After eight consecutive weeks of gains, it is time to consider when strength becomes exhaustion in the stock market. Overbought Eventually Means Overbought SPDR S&P 500 (NYSE: SPY) closed up 0.11% in a holiday-shortened trading week. This was the eighth time in a row SPY posted a weekly gain. It was also the smallest weekly gain in the winning streak and the second week in a row the rate of change has declined.#-ad_banner-# The concept of overbought is a challenging one, and traders have spent countless hours trying to understand it. Many indicators, such as… Read More

After eight consecutive weeks of gains, it is time to consider when strength becomes exhaustion in the stock market. Overbought Eventually Means Overbought SPDR S&P 500 (NYSE: SPY) closed up 0.11% in a holiday-shortened trading week. This was the eighth time in a row SPY posted a weekly gain. It was also the smallest weekly gain in the winning streak and the second week in a row the rate of change has declined.#-ad_banner-# The concept of overbought is a challenging one, and traders have spent countless hours trying to understand it. Many indicators, such as stochastics and Relative Strength Index (RSI), are used to define an overbought market, but they all share a common flaw. At the beginning of a very strong up move, markets become overbought and stay overbought. The chart below demonstrates the challenge of defining when a market is overbought. SPY is shown with the stochastics indicator. The monthly chart is used to decrease the sensitivity of the indicator, but similar patterns can be seen on weekly and daily charts. Stochastics became overbought in 2003 and remained overbought until the end of 2007. Read More

The head-and-shoulders (H&S) top is one of the best-known patterns in technical analysis. This pattern was first written about in 1930 by a financial editor at Forbes magazine who described how the H&S forms and how it can be traded. Many readers are familiar with the H&S pattern. On a price chart, there will be three peaks in price at the end of the uptrend, with the center peak (the head) being higher than the other two. The peaks on the sides (the shoulders) should be about equal in height. Connecting the bottom of the peaks gives us… Read More

The head-and-shoulders (H&S) top is one of the best-known patterns in technical analysis. This pattern was first written about in 1930 by a financial editor at Forbes magazine who described how the H&S forms and how it can be traded. Many readers are familiar with the H&S pattern. On a price chart, there will be three peaks in price at the end of the uptrend, with the center peak (the head) being higher than the other two. The peaks on the sides (the shoulders) should be about equal in height. Connecting the bottom of the peaks gives us the neckline, and breaking the neckline is the sell signal. Real H&S patterns rarely resemble the precise line diagrams seen in books, and the chart below shows one that occurred in real market conditions. The shoulders are nearly, but not quite, the same height. The problem with charts is that their interpretation is subjective. Many traders find an H&S in almost every chart they look at because some traders tend to see whatever they want to see. Because traders see what they want to see, results vary. Some may find success looking at charts while others will suffer… Read More

The S&P 500 has now closed higher seven weeks in a row. We need to consider the possibility that we are at the start of another bull market.#-ad_banner-#​ Stocks Are Bullish, but Not Bubbly After gaining 0.42% last week, SPDR S&P 500 (NYSE: SPY) is now up seven weeks in a row. While that gain may seem small, it is actually more than three times larger than the typical one-week gain in SPY. Since January 2001, the ETF has delivered an average one-week gain of 0.12%. Seven consecutive weeks of… Read More

The S&P 500 has now closed higher seven weeks in a row. We need to consider the possibility that we are at the start of another bull market.#-ad_banner-#​ Stocks Are Bullish, but Not Bubbly After gaining 0.42% last week, SPDR S&P 500 (NYSE: SPY) is now up seven weeks in a row. While that gain may seem small, it is actually more than three times larger than the typical one-week gain in SPY. Since January 2001, the ETF has delivered an average one-week gain of 0.12%. Seven consecutive weeks of gains is an unusual price move for the broad stock market averages. It indicates that there is a great deal of demand for stocks and traders are buying. This is obviously an oversimplification, but in general terms, demand exceeding supply is the underlying cause of a price rise in any market. When stocks bottomed in March 2009, SPY moved up six weeks in a row. That is typical of the price action at market bottoms. We saw similar signs of strength in 2002, and in the Dow Jones Industrial Average at the beginning of the historic bull market in 1982. Read More