Stocks finish mixed to mostly flat – 7th time in last two weeks

Thursday, February 26, 2015 -

It just keeps going on and on – stocks turned in another lackluster performance ending mixed to mostly flat during Thursday’s trading day.

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It was the 7th time in less than two weeks that the U.S. stock market ended mostly flat as traders remain unwilling to take profits or gamble on higher prices ahead – apparently waiting for some economic or geopolitical catalyst to shake prices in one direction or another.

The tech-heavy Nasdaq climbed 21 points (+0.4%) to 4,988, moving within striking distance of its record highs, while the Dow edged down 10 points (-0.1%) to 18,214 and the S&P 500 dipped 3 points (-0.2%) to 2,111. The NYSE finished at -0.32% and the small cap Russell 2000 at +0.32%.

Clearly, the broader markets are exhibiting nervous uncertainty as we continue to see day after day of choppy sideways trading at the top of an overbought trading channel. Only the Nasdaq indexes have managed to show a fairly strong breakout above the last four months of sideways movement – mostly on the back of large tech companies, like Apple, meeting or beating earnings expectations for the Q4 2014 season. The rest of the market is beginning to roll over.

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Weak Economic Data

The economic data continues to roll in favoring a coming contraction and potential recession, though the administration and government economists will be the last to admit it.

Today, the Labor Department released initial jobless claims showing a rise by much more than expected in the week ended February 21st. Initial claims jumped to 313,000, an increase of 31,000 from the previous week’s revised level of 282,000. Economists had expected jobless claims to edge up to 290,000.

A separate report from the Labor Department showed that consumer prices fell by slightly more than expected in January amid another substantial decrease in energy prices.

The Labor Department said its consumer price index tumbled by 0.7 percent in January after falling by 0.3 percent in each of the two previous months. Economists had expected the index to drop by 0.6 percent.

Meanwhile, excluding food and energy prices, the core consumer price index edged up by 0.2 percent in January after inching up by 0.1 percent in December. Core prices had been expected to tick up by another 0.1 percent.

In another time, absent so much government and central bank intervention, falling energy prices should act as a stimulus to the economy. But it is not happening this time around.

We continue to see shrinking demand and strong global evidence of deflation, not moderate inflation. Energy prices have fallen too far too fast and are too slow in coming back to where new energy developments can afford to pay back speculative bonds that supported so much of our spike in domestic energy development in the Dakotas, Nebraska and northward into Canada.

Check out the following chart, which shows a history of the Consumer Price Index, with and without the volatile food and energy sectors:

50226CPIDecline

Notice how the combined CPI roared from 2005 through early 2008 and then took a nosedive toward the end of 2008. We saw a similar deflationary trend in 2008 as we are seeing here in late 2014 and 2015. The CPI has shown a lackluster chop below 2% for more than three years, only recently heading toward negative territory again.

This is symptomatic of a contraction heading into a new recession.

The market hit its highs last time in late 2007 before the collapse of 2008 – both in the stock market, banking system and the economy. This chart is point the same way as we head into this New Year.

Perhaps that is why we see so much sideways trading recently. Does the smart money know where the market and the economy is headed?

Durable Goods Up – but weak

Reflecting a notable rebound in orders for transportation equipment, the Commerce Department also released the Durable Goods Report today, showing that durable goods orders increased some in January.

The report said durable goods orders climbed by 2.8 percent in January after tumbling by a revised 3.7 percent in December. Economists had expected durable goods orders to jump by 1.7 percent – but there is a caveat here.

Excluding the rebound in orders for transportation equipment (kind of like food and energy for the CIP), durable goods orders rose by just 0.3 percent compared to economist estimates for a 0.5 percent increase. That is an expectation miss, huh?

Once again manipulation of huge transportation dollars can sway what the headline Durable Orders shows versus reality. Tomorrow we will get a glimpse into business activity in the Chicago area, helping us evaluate whether durable goods are healthy or not – certainly, following a nearly 4% drop it would be normal to see a rise of some measure but still be too weak for a healthy recovery.

Broad Market Rolling Over?

We have a chart that we look at nearly every day to give us a clue as to the health of the market and when it might be close to reversing directions. That chart is the percentage of stocks whose price is above the 50-day moving averages. We have added a number of “indicators” on this percentage to help detect market reversals.

Check it out:

50226NYOver50

The light brown line is the percentage of stocks over their 50-day moving averages. We have put a red and green moving average overlay on this which reliably indicates a market reversal when they cross – which they are very close to doing.

The grey candlestick patterns are the NYSE prices.

If you look at the top indicator, the MACD, you will note that when the black/brown moving averages cross, it also reliably indicates a market reversal. These averages just crossed negative the last two days.

The second indicator called CCI is a commodity channel indicator, but it also is quite accurate when applied to the percentage of stocks over their 50-day moving average. When it crosses the horizontal zero mark it is extremely close to market reversal tops and bottoms. It has recently fallen out of the upper bullish territory and is rapidly descending – it could cross below zero any time now.

And finally, the very bottom indicator is a combination stochastic / relative strength that usually switches a few days before the actual market reversal. It also went bearish two days ago.

Though this indicator did not break above the overbought line at 80% it looks close to turning down, suggesting risk of a market correction remains high.

Looking Ahead

Trading on Friday may be impacted by another batch of U.S. economic data, including reports on fourth quarter GDP, consumer sentiment, pending home sales, and Chicago-area business activity.

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