Market Report

2011 Performance Table and Multi-Year Chart

31-Dec-2011 03-Feb-2012 YTD Chg %YTD Chg
DJIA 12,218 12,862 644 5.3%
S&P 500 1258 1345 87 6.9%
Nasdaq 2605 2906 301 11.6%
The S&P 500 is a capitalization-weighted index of 500 stocks. Historically, the performance of the S&P 500 has been an accurate barometer of trends in the U.S. economy based upon price changes in the underlying stocks. The S&P 500 represents all major industries in the domestic economy.

S&P 500 Large Cap Index -- 2007 to present with 200 day-moving average

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Current Equity Market Outlook

A cyclical-bear market began in August 2011. Our current outlook is for lower prices going forward. Bear markets tend to take virtually all equity sectors lower. On average, bear markets last approximately nine months.

Market Commentary

By J. F. Cabbiness
Date: January 29, 2012

Bull Market Intact For Now

Here more than anywhere in the world, is the land of illusion [Wall Street]. Things are not what they seem. Two and two don't always make four . . . Caveat emptor -- 'Let the buyer beware'.
~Gerald M. Loeb

Since the sharp decline in August, taking down the S&P 500 roughly 19.5%, it has been my contention that a bear market is in place. The bear market assertion largely rests upon a technical indicator that has reliably signaled bear markets in the past: the MACD (moving average convergence divergence) indicator and to a lesser extent, other supporting indicators like the long-term VIX (volatility index) and bearish moving average crossovers that occurred subsequent to the August decline on various indices. Recent moving average reversals, a dramatic decline in the VIX and movement of the S&P 500 above important resistance necessarily calls my bear-market thesis into question. Thus, given the weight of evidence, it appears that the current advance represents not a bear market, but rather a rally in a on-going bull market that began in 2009.
That the current rally is within the context of an on-going bull market is not without precedent. As was presented here in a column several months ago, like the recent August decline over debt worries, the S&P 500 dropped sharply in 1998 as a result of the Russian default of that year. That decline was merely a correction in an on-going secular-bull market. After the 1998 correction had run its course, stocks took off and never looked back. Is something similar happening now?
While the sharp correction that began in August appears similar to the decline in 1998, there is a very important distinction: the August 2011 correction took place in the context of a cyclical-bull market within a secular (long-term) bear market The 1998 equity market was of the secular-bull variety. This distinction is key.
To the extent that the August decline was merely a correction, the cyclical-bull market that began in 2009 is now three-years old and up some 97.6%; long in the tooth for a cyclical-bull market. So just how much longer can equities continue to rise and how much further?
This is not a typical bull market. A great deal of risk is present. There continues to be an unprecedented amount of manipulation by world central banks. A de facto sovereign default is now taking place in Greece, the first in over sixty years, and more sovereign defaults are likely in the years to come. The risk of a domestic recession this year is by no means off the table.
The Takeaway
For now, the Market clearly believes that there will be no domestic recession this year and that a global financial crisis emanating from Europe will be averted. Hence, the recent decline in bond prices along with the U.S. dollar and concomitant rise in precious metals along with the on-going rally in equities. Beware, if this line of reasoning should come into question in the months ahead, another August-like decline could occur!

Long-Term Market Indices

S&P 500 Large Cap Index -- 1980 to Present

Dow Jones Industrial Average -- 1980 to Present

Nasdaq Composite Index -- 1980 to Present

NYSE Composite Index -- 1980 to Present

Short-Term Analysis of Market Indices

A S&P 500 Composite Index (SPX) a long-term bearish MACD crossover has occurred (see Long-Term charts above) indicating that a bear market has begun; however, given current momentum, the bear-market MACD signal may soon be reversed.
The SPX was sharply higher during the week, moving farther above major resistance (now support) just below 1300. A bullish crossover of the 50-day and 200-day moving averages occurred recently. The RSI indicator remains at a level that has signaled a short-term top in the past.

The S&P 500 Percent of Stocks Above 50-Day Moving Average was higher during the week, remaining above its 50-day and 200-day moving averages.

The Value Line Arithmetic Index (VLE), containing 1,700 companies from the NYSE, Nasdaq and American Stock Exchange is not capitalization weighted and therefore cannot be disproportionately influenced by stocks with large market capitalizations.
The VLE was higher during the week, remaining above important resistance (now support). The RSI indicator continues to show an extreme overbought condition, suggesting a pull back may be forthcoming.

The Russell MidCap Index is a commonly used benchmark for mid-sized companies covering over 7% of the U.S. equity market.
Mid cap stocks were higher during the week. The RSI indicator implies an increased risk for a pull back.

The Russell 2000 Small Cap Index measures the performance of small-capitalization stocks in the U.S. equity markets.
Small cap stocks were higher during the week as the risk-on trade returned in a big way. As is the case with many indices, the RSI indicator is showing an overbought condition, implying elevated risk of a short-term pullback. A bullish crossover of the 50-day and 200-day moving averages has occurred.

Current Market Sentiment Indicators

An invaluable tool of savvy traders, sentiment indicators are used to identify levels of optimism or pessimism present in markets. Unusually high or low levels of optimism or pessimism can signal proximity to market tops or bottoms both on a short term and long-term basis.
Investors Intelligence Sentiment Survey: monitors the market sentiment of more than 100 independent investment newsletters. When the bull and bear spread (percentage of bullish less bearish advisors) falls to -20% or thereabouts, pessimistic sentiment is at its peak, which usually heralds a bottom (short term or trader's) in the market.
The spread decreased marginally during the week to 19.1% from 21.3% last week.
Data as of: 02/01/2012

American Association of Individual Investors Sentiment Survey monitors the sentiment of individual investors. This survey is thought by many professional traders to be one of the most reliable contrary indicators.
Bullish sentiment decreased to 18.7% from 29.9% the previous week.

Data as of: 02/02/2012

CBOE Volatility Index (VIX): a measure of how much fear is in the market based on premiums in option contracts on the S&P 500 Composite Index. Option premiums rise as put options are purchased to protect portfolios from market declines.
The VIX decreased was flat during the week remaining below the important 200-day moving average. A bullish crossover of the 50-day and 200-day moving averages has occurred.

Below is a long-term chart of the VIX. Notice that readings above 25 tend to occur during bear markets.
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A contrary sentiment indicator, the CBOE Options Equity Put/Call Ratio measures the amount of puts relative to calls purchased by investors. When investors anticipate falling stock prices the ratio tends to increase. During bull markets, spikes in put buying tend to correlate with impending market lows.
Put buying relative to call buying increased during the week after dropping to the lowest level since last February the previous week. The blue shaded areas on the chart show that PPO near +20 has accurately identified 7 of 9 short term tops in the S&P 500 over the past 2.5 years.

Investment Company Institute total equity fund flow information. As investors become bullish on stocks, equity fund flows increase to positive net inflows; conversely, as investors become bearish on stocks, equity fund flows tend to decrease to net outflows.

Data as of 01/25/2012 courtesy of Investment Company Institute
(note: data for the past approximately1.5 months is estimated and shown below)

1/4/2012	-9,041
1/11/2012	1,420
1/18/2012	-481
1/25/2012	1,174

Leading Economic Indicators

Leading economic indicators are followed closely by many professional investors because of their sensitivity to marginal changes in economic conditions before such changes become evident in the economy as a whole. They are often quite useful as short-term predictors of trends in economic conditions.
The Baltic Dry Index (BDI) is a measure of world-wide demand for various commodities used to produce finished goods that are transported by dry-bulk carriers. The index is used to predict trends in future global economic activity. The BDI is extremely sensitive to changes in demand for dry-bulk carriers and hence global commodity input demand.
Weakness in this index, dating back to the fourth quarter of last year, was a valid early warning of an economic slowdown in emerging markets and, apparently, in developed markets as well.
When economic activity in emerging markets eventually increases, this index will give an early signal.
With the recent downturn, the bearish series of lower highs beginning in late 2010 remains in place.

Credit Market Watch

Intelligent investors regularly monitor credit markets for signs of stress. Widening spreads can presage trouble in equity markets.
The Treasury - EuroDollar Spread (TED) otherwise known as the TED Spread, reflects the difference in yields between LIBOR (private interbank) loans and three-month U.S. Treasury bills -- often referred to as T-bills. When financial trouble occurs, or is anticipated (such as recessions, etc.), banks are often loathe to lend to each other. As such, LIBOR rates tend to rise relative to T-bill rates which are considered risk free. Widening spreads are indicative of contracting credit availability which tends to inject dis-inflationary pressures to the economy reducing output. Spreads of 100 basis points (1%) have, in the past, been associated with tops. In times of panic, however, spreads can increase beyond the norm. For example, during the panic of 2008 spreads widened to over 450 basis points (4.5%) to a record high.
The TED has dropped below the highest level that occurred during the 2010 European debt scare -- WATCH!.

Charts of Interest

This section highlights investments and indexes that are currently in the news or that are representative of the strongest (or weakest) areas of the market.
Oil Light Crude Continuous Contract ($WTIC) is an index tracking West Texas Intermediate crude oil, a type of crude oil used as a benchmark in oil pricing. It is the commodity used by the New York Mercantile Exchange's oil futures contracts.
During the week, oil dropped below its 50-day moving average.

Russell 1000 Energy Index measures the performance of the securities classified in the energy sector of the large cap U.S. Equity market.
During the week, this index moved higher, now at multi-month resistance.
The Reuters/Jefferies CRB Index (CRB) is designed to track trends in commodities. The index is made up of 19 commodities which are quoted on the NYMEX, CBOT, LME, CME and COMEX exchanges.
This index remains above its downward sloping trend line. The current pattern continues suggest widespread economic weakness globally.
The U.S. Dollar Index ($USD) measures the value of the U.S. dollar relative to a basket of six major world currencies. The U.S. dollar as a tradable currency appears to be in a secular-bear market.
The dollar was marginally lower during the week, remaining below its 50-day average. This calls into question whether multi-month bull run in the dollar is at an end. The second chart shows the multi-year USD trend as well as what happened the past several times following a bullish crossover of the 50-day and 200-day moving averages.
SPDR Gold Shares (GLD) seeks to replicate the market price of gold bullion. Structured as a trust, GLD holds physical gold. The trust allows investors to participate in the gold market without physically owning the metal. Gold appears to be in a secular-bull market.
Gold was marginally lower during the week, buy bullishly remains above resistance in a pennant pattern. The multi-month consolidation phase for gold may be at an end.
A long-term chart of gold with Fib targets is below. The initial downside target for the consolidation of 0.318 at approximately $1305 may not be achieved.
iShares Silver Trust (SLV) is an ETF that approximates the market price of silver which allows investors to participate in the silver market through the securities market without actually physically owning the metal.
Silver was marginally higher on the week, bullishly remaining above its 200-day moving average. A bearish crossover of the 50-day and 200-day moving averages has occurred.
Below is a multi-year, weekly chart of SLV . Given the strong move recently, this metal should be watched closely for signals that the consolidation is over. Silver typically leads the metals higher, outpacing gold in relative terms.
The Dow Jones U.S. Financial Services Index tracks the price and yield performance of the financial-services sector of the U.S. equity market. This has been (and remains) one of the weakest areas of the equity market.
This lagging index moved above its downwardly sloping trend line in the previous week and surged higher on Friday in conjunction with a strong U.S. employment report..

Cyclical-Bull Market Performance Table

The last cyclical-bull market began in 2009 and is on going. Here's a breakdown:

S&P 500 Large Cap Index -- March, 2009 to Present
Index 10-Mar-2009 03-Feb-2012 Change % Change
S&P 500 666 1345 679 102.0%

Articles of Interest

This section periodically updated during the week.
In accordance with Title 17 USC Section 107, materials are distributed for fair use and educational purposes

Goldman: S&P 500 Will End 2012 at 1,250
The Standard & Poor’s 500 Index will end next year at 1,250 as a stagnating U.S. economy damps valuation increases for equities, Goldman Sachs Group Inc. (GS)’s David Kostin said.
Crony Capitalism Report: Ritholtz Slams Paulson, Lauds Judge for Denying SEC-Citi Deal
Three big stories this week say a lot about the sorry state of American capitalism. Each development is deeply troubling but the revelations by some enterprising journalists and one Federal Judge's decision do offer some hope that rampant cronyism will no longer be tolerated.
Global economic outlook grim, China tells U.S. trade talks
Chinese Vice-Premier Wang Qishan warned on Monday the global economy is in a grim state and the visiting U.S. commerce secretary said China would spend $1.7 trillion on strategic sectors as Beijing seeks to bolster waning growth.
Growth in US equities in danger of peaking
US equities have been a stand out performer in a dismal year for stocks globally, driven in large part by strong corporate earnings But many forecasters fear the growth engine may be running out of fuel.
Fourth-Quarter S&P 500 Profit Expectations Fall Fast
Despite strong third-quarter profit results, the outlook for the last three months of 2011 has deteriorated as corporate chiefs tampdown expectations in the face of the European debt crisis and a sluggish economy at home.
How a Financial Pro Lost His House
ONE night a few years ago, when the value of our home had collapsed, our debt was out of control and my financial planning business was shaky, I went to take out the trash.
Art Cashin Puts the Rally in Perspective
Wall Street legend Art Cashin, of UBS, warns in his note today that there are still hard times ahead. Maybe as soon as next week?
Rate of profit growth to slow dramatically
The third quarter earnings season in the US has turned out better than many initially feared. However, the challenges facing the corporate sector over the coming months are significant, and the likelihood is that the rate of profit growth will slow dramatically, or possibly go into negative territory, says William Sels, UK head of investment strategy at HSBC…
Goldman: Stop Kidding Yourself, The Economy Is Weak And Got Worse In October
Goldman's own proprietary Analyst Index does not reflect the modest cheer that people are feeling about the economy.
PIMCO's Gross: U.S. banks need more capitalization
U.S. banks have not done enough to ensure they are well capitalized, and getting back to a system where retail and investment banking are separated would be attractive in terms of reform, Bill Gross, manager of the world's largest bond fund, said on Tuesday.
Charlie Munger: EU Leaders ’Behind the Curve’ on Crisis
"They are way behind the curve," Munger, 87, told Bloomberg Television's Shivaune Field in an interview today in Los Angeles. "They have to stop shooting at this elephant with a pea shooter."
Nightmare scenario: U.S. deflation risks rising
Risks are rising that a moribund job market and potentially steep drop in inflation could push the United States into a downward spiral of falling wages and prices.