Stocks In 2014: How'd We Get Here and What Does It Mean?

Thirty-five trading days into the new year, the S&P stands just about where it started. But to say that nothing has happened in the market so far this year would certainly be misleading. In case you haven't been paying close attention, it is important to remember that the S&P experienced its first pullback of more than 5 percent in nearly a year and then recovered the entire drop in a span of a couple weeks.

So, with the S&P within a whisker of its all-time high, the natural question at this stage of the game would seem to be: What the heck is going on here?

Set Up For A Pullback

To be sure, investors were guilty of coming into 2014 with a severe case of complacency. The bull stampede was obvious to anyone looking at a chart and just about everybody in the game could reel off the bullish factors evident in the market. As such, every sentiment reading in our arsenal of indicators/models was screaming for attention and one of our long-term sentiment indicators had flashed a sell signal back in November.

And yet, despite the fact that stocks were overbought, over-believed, and becoming a bit overvalued, stocks continued to march higher at the end of the year as the year-end rally took place right on cue. So, with the S&P finishing the year at a fresh all-time high, most analysts were looking for the bulls to continue to romp in 2014.

To be fair however, a fair amount of Wall Street gurus did go on record as saying that a meaningful correction was likely to occur at some point during the year but that 2014 would ultimately wind up producing decent gains for stock market investors.

But as 2014 began, the bottom line was stocks were set up for a pullback. All that was needed was a catalyst.

The Little Crisis That Couldn't

Although many in the bear camp were focused on the punk economic data that had started to crop up, our furry friends finally found a catalyst to cause some selling: a budding crisis in the emerging markets.

It turns out that money had been streaming out of places like Argentina, Turkey, Russia, etc. for some time and the continuous outflows were beginning to create problems for the currencies of these countries; most of which, you couldn't pronounce, let alone spell properly.

As is often the case on Wall Street, things don't matter until they do. And it was quickly becoming apparent that the currencies of the emerging markets suddenly mattered - a lot. There was talk of a 1998-style crisis. There was talk of default. And there was an awful lot of selling going on in just about every risk asset.

Cue the "Bazooka"

However, the so-called crisis ended before it really got started. The key was the fact that the central bankers of the emerging market countries took a page out of the Bernanke/Draghi play book and quickly trotted out their "bazookas."

In case the crisis measures of central bankers isn't something you keep up on, the idea here is for the central bank in question to threaten unlimited intervention in order to quell the problems in the country's currency. And in central banker parlance, this is called the "bazooka."

Boom, just like that, the crisis was over. And the funny part is that the central bankers didn't even have to fire their big guns. Nope, they just had to remind the hedge fund managers and big bankers who were shorting everything under the sun, that they did indeed have a weapon.

Therefore, one day into February, the crisis was over and the rebound was on. However, a great many investors with a bearish bent began to refocus their attention on the U.S. economic data, which had been coming in weak across the board.

Blame It On the Weather (Everybody Else Is!)

One of the big bearish themes so far in 2014 has been the weaker-than-expected economic data. The thinking is that the economy may be hitting yet another speed bump at precisely the time that the Fed is starting to back away from their stimulus plans. And if this thesis plays out as projected, the bears contend that the resulting action in the stock market could be ugly.

But so far at least, the bulls have been able to refute the thesis by blaming the bad data on the weather.

Turning to the near-term, perhaps the biggest theme of the past week was the continued inability of weaker-than-expected economic data to cause any real fear in the market. For example, while the Philly Fed report was a disaster (the index fell into negative territory for the first time in eight months), the report did say that the weakness was mostly attributable to the cold, the snow, the wind, and the freezing rain. In addition, the Philly Fed noted that respondents remained optimistic about the growth of overall manufacturing over the next six months.

The weather also received a fair amount of blame for the 15 percent decline seen in January housing starts. Some of the data contained in this report was downright shocking as housing starts in the Midwest plunged nearly 70 percent to the lowest level on record. But, as anyone in that area of the country will attest, this has been one of the most brutal winters in history. Thus, it isn't surprising that folks are holed up at home and waiting for the weather to break.

In addition, the National Association of Home Builders said that weather conditions dampened homebuyer traffic last month. The cold and snowy weather pattern helped to drive biggest monthly decline in homebuilder sentiment on record in February.

And Yet, Here We Are

Through it all though, the S&P 500 closed Friday within spitting distance of an all-time high.

S&P 500 Daily

So, what's the takeaway from the action over the past couple of months, you ask? In short, it appears that traders are giving the economic data a pass for now. However, it is worth noting that the buying/short-covering that reversed the January correction looks to be waning as the S&P failed each and every day last week to break on through to the other side of the current resistance zone.

From here, investors will want to watch the action around the 1850 zone. It is a pretty good bet that any data refuting the bearish #growthslowing theme could give the bulls the edge here. But it is clear that the resistance overhead is formidable. So, how the market acts going forward will tell us a lot about which team is likely to make the next important move.

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Turning To This Morning... Despite weakness in China (Shanghai fell -1.74%) attributed to concerns about credit tightening in the housing market and political turmoil in both the Ukraine and Egypt, futures in the U.S. market are pointing to a modestly higher open on Wall Street. The only piece of economic data due out today will be the February PMI Services flash report due out at 8:58 am eastern.

Pre-Game Indicators

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

Major Foreign Markets:
- Japan: -0.19%
- Hong Kong: -0.79%
- Shanghai: -1.74%
- London: -0.12%
- Germany: +0.11%
- France: +0.34%
- Italy: -0.08%
- Spain: -0.64%

Crude Oil Futures: +$0.06 to $102.76

Gold: +$9.00 at $1332.60

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

10-Year Bond Yield: Currently trading at 2.745%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +5.25
- Dow Jones Industrial Average: +41
- NASDAQ Composite: +12.20

Thought For The Day...

"We must not look to government to solve our problems. Government is the problem" -- Ronald Reagan

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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 Investing 101 on Feb 24, 2014 — 8:02 AM
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