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7 Short-Term Issues the Market Is Facing


While the S&P 500 has seen a good deal of bullish action in the intermediate term, there are some issues to be aware of in the short-term.

Following the 90% two-day two-step, the SPX went into a five-day consolidation pattern between roughly 1455 and 1465, forming what our technical analyst called a "bullish flag" formation. Bullish flag formations are typically found in stocks, or indexes, that are in a strong uptrend. They are called bull flags because the pattern looks like a flag on a pole. It becomes "bullish" when the price is resolved out of the topside of the "flag," which is what happened last Thursday. Not only did the SPX break out of its flag formation, but in the process punched to a five-year closing high. It also may have completed a break out above the neckline of a head and shoulders bottom (see chart below). While all of this is pretty bullish in the intermediate term, there are some issues in the short-term.

Click to enlarge

1. The SPX has travelled into my 1465 – 1475 overhead resistance zone. As stated last week, the SPX likely will not make it through that level on its first try, just like it couldn't surmount the 1420 – 1430 level on its first attempt. Recall, it took multiple tries to travel significantly above 1430.

2. The D-J Industrials and Dow Jones Transports (INDEXDJX:DJT) failed to better their previous reaction high of October 2012 and July 2011, respectively. Potentially that could be a giant upside non-confirmation.

3. The McClellan Oscillator is overbought.

4. All of the macro sectors have pushed into overbought territory for the first time since last September.

5. The Volatility Index (^VIX)) has fallen to a five-year low (read: too complacent).

6. According to Investor's Intelligence the bull/bear ratio, at 51.1% bulls and 23.4% bears, is at its most bullish spread since the SPX was making its reaction high of 1475 last September.

7. ALL of the world markets I monitor are overbought except for Indonesia.

On the positive side is that there are many more advancing stocks than decline stocks (positive breadth), ditto stocks making New Highs are expanding, there is no evidence that the Selling Pressure Index is increasing (it's at its lowest level since July 2011) while the Buying Power Index at its highest level since May 2012, select indices have made new all-time highs (Russell 2000 (INDEXRUSSELL:RUT)), the Dollar Index is breaking down (bullish for stocks and commodities), China's economic statistic improved last week, Euroquake is off the "front burner," and the list goes on.

So what does this mean for the markets? Well, while I don't expect the SPX to break through its September 2012 "highs" (1475) on the first attempt, I think those highs will eventually give way. So far most of US indices are up some 3% YTD with Midcaps (NYSEARCA:IJH) and Smallcaps (NYSEARCA:IJR) outperforming large caps while growth outperforms the value complex. The leading sectors YTD are financials, materials, health care, and industrials. Meanwhile, crude oil (NYSEARCA:USO) is up, gold (NYSEARCA:GLD) is marginally lower, and the fixed income ETFs I track are down across the board. I think when the SPX convincingly breaks above its September 2012 high of 1475 the large caps will play catch-up. One of the ways to play that theme is using the ~3% yielding Powershares S&P 500 Low Volatility ETF (NYSEARCA:SPLV). As always, terms and details should be vetted before purchase.

Speaking to individual stocks, since the financials have been one of the top performers YTD, I screened our bank stock research universe looking for stocks under $10 per share that are strong buy rated and look good technically. Two names surface, those being Huntington Bancshares (NASDAQ:HBAN) and Regions Financial (NYSE:RF). Of course for a broader brush, I own, and recommend, my friend Davis Ellison's Hennessy Small Cap Financial Fund (MUTF:HSFNX), formerly FBR Small Cap Financial Fund.

The call for this week: Last week saw the highest flows into stock funds in six years. Those flows, over the past two weeks, have lifted the broadest-based index, the Wilshire 5000 (MUTF:WFIVX) by $500 billion! That rally has caused the Wilshire to make a much clearer upside breakout than the SPX; it is closer to its all-time 2007 high than the SPX (see chart below). I think the Wilshire is eventually pointing the way higher, despite the current near-term overbought condition. This week should tell if it is a true upside breakout, or if we will need to spend some more time consolidating before trading higher.

No positions in stocks mentioned.
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