Next Move: Blow-Off or Blow Up?

Spending copious amounts of time in cars, airports, and airplanes generally provides the opportunity to take a step (or three) back from the blinking screens (although to be honest it is pretty easy to check in on the market via an iPhone these days) and regain a feel for the big picture.

As is oftentimes the case, the state of the current market can be summed up with one simple question. After an impressive bull market run, are stocks now setting up for the traditional "blow-off" top or has the run become so extended that the indices are primed for a bearish blow-up?

What Is The Message From The Charts?

While there are almost always opposing opinions from the bull and bear camps, one can usually settle the argument by looking at the charts of the major stock market indices. So, let's take a peek at some charts and see if a consensus can be reached here on the overall state of the market.

S&P 500 Daily

Rarely is a line of resistance as evident as it is now. Whether you use paint, a fine writing instrument, or a crayon to draw it, the "ceiling" at 1850 on the S&P 500 is pretty darned obvious.

What's interesting here is that the 1850 level now acts as a trigger point for the so-called fast-money types. For example, on Wednesday, the market was busy movin' on up and things were looking pretty good right up until the old highs at 1848 were broached. Then, with the help of the terrorist threat level being upgraded due to a "credible threat" as well as the usual bevy of Fed-speak, the indices quickly succumbed to sell programs. Then, once the "reversal" was recognized by the algos, it was all downhill from there. And this, dear readers, is what the term "overhead resistance" is all about.

Of course the bulls will argue that the resistance zone around 1850 will prove temporary. "Just look at the action in the NASDAQ," we're told. "Leaders lead!" appears to be the battle cry here. But a quick glance at the chart does seem to support the argument that it's only a matter of time before the bulls will ultimately prevail.

NASDAQ Composite Daily

In looking at the chart above, as long as the NASDAQ stays above 4240 or so, the odds would seem to favor the bulls.

Or do they? Check out the charts of the Russell and the DJIA!

Russell 2000 Daily

Dow Jones Industrial Average Daily

So... While bull markets, like beauty, often lie in the eyes of the beholder, the jury appears to be out on whether or not the next short-term move will be up or down. A meaningful move above 1850 on the S&P 500 would certainly suggest that the bulls would be in control of the ball. And at the same time, a serious break below 4220 on the NASDAQ would seem to auger well for the bears.

What Then?

Assuming the bulls can break on through to the other side of the current resistance zone, the next question will be whether or not a "blow-off" top is at hand. Some analysts argue that the current bull move is growing long in the tooth and that any further rally from here might be fraught with risk.

S&P 500 Monthly

But as the saying goes, isn't a market that is making new highs positive by definition? Wouldn't a break above the current wall of resistance suggest that a new leg higher was underway? And isn't the combination of an improving economy, strong earnings, low rates, and a low inflation environment positive?

Yes, Virginia, all of the above are positive inputs. However, it is also important to recognize that all good things come to an end eventually. Even if the economy doesn't roll over into recession (remember, the primary cause of bear markets has historically been a recession) bear markets tend to crop every once in a while.

Watch Further Rallies VERY Carefully

So, given that the S&P has gained nearly 180% since March 9, 2009, it wouldn't be terribly surprising to see the bears run with the ball for a while at some point. This is especially true since it is year two of the Presidential cycle, which have historically not been great years for stock prices.

To be sure, we are not calling for a bear to begin and we are most certainly not suggesting that anyone run for cover at this time. No, we will let our objective indicators tell us if/when the environment weakens to the point where a serious decline may be probable.

But until then, investors should watch the action closely - especially if the market rallies from here. You see, the final stages of a bull market typically are defined by narrowing leadership, divergences, and weaker-than-average momentum - even if the major indices are making new highs in the process.

Put another way, we need to be cognizant of the quality of any rallies from here. Because anything that is sub-par on this score could turn the blow-off into a bearish blow-up very quickly.

Looking for Guidance in the Markets? We can help...

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

The Top 5 Portfolio: We keep things simple here by focusing on our five favorite positions. This concentrated stock portfolio employs a rigorous custom stock selection approach to identify market leaders. Risk management strategies are built in to every position.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

Looking For Money Management Help?

If you are looking for help with money management, check out Heritage Capital Management's Active Risk Manager Service - or call Heritage for more information at (630) 250-4700.

ALL NEW: The next generation of the Daily Decision system is now available to clients of Heritage Capital. The new and improved approach (which is not available in subscription form due to the complex nature of trading the program) utilizes swing trading during neutral market environments, multiple indices for long positions, incremental moves in and out of the market, multiple managers and multiple strategies - with the overall goal being reduced volatility and a smoother ride. Contact Heritage for details at (630) 250-4700.

Turning To This Morning... Having retraced the prior day's algo-induced dive yesterday, the S&P 500 once again starts the day within spitting distance of an all-time high. A weaker yen helped the Nikkei surge +2.88% overnight while European bourses are fractionally mixed ahead of the open on Wall Street. Here in the U.S., traders will get more data as the report on existing home sales, which will likely be impacted by weather, is due out at 10:00 am eastern. In addition Fed governors Bullard and Fisher will provide input to today's trade.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
- Japan: +2.88%
- Hong Kong: +0.78%
- Shanghai: -1.16%
- London: +0.21%
- Germany: +0.06%
- France: +0.33%
- Italy: -0.30%
- Spain: -0.27%

Crude Oil Futures: -$0.25 to $102.50

Gold: +$5.30 at $1322.20

Dollar: lower against the yen and euro, higher vs. pound

10-Year Bond Yield: Currently trading at 2.771%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +3.47
- Dow Jones Industrial Average: +32
- NASDAQ Composite: +7.78

Thought For The Day...

"Happiness is when what you think, what you say, and what you do are in harmony." -- Mahatma Gandhi

Are you getting all the market research you need?

Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

Our Mission Statement:

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

Follow on Twitter: @StateDave


The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.

Posted to State of the Markets on Feb 21, 2014 — 8:02 AM
Comments ({[comments.length]})
Sort By:
Loading Comments
No comments. Break the ice and be the first!
Error loading comments Click here to retry
No comments found matching this filter
Want to add a comment? Take me to the new comment box!