Market Rally Is Tenuous – Set Targets and Take Profits – Use SPY $181.50 As Your Stop.

February 13, 2014

We are off to a volatile start in 2014. January is typically a bullish month and the market leaked oil for 30 days (warning sign). That selling culminated with the 100-day moving average breach. Major support was tested at SPY $173.60 and it was retested a week ago.

The market capitulated and we jumped on that buying opportunity.

Stocks staged an 80-point snapback rally and shorts ran for cover. Good news this week added fuel to the fire.

The market loves easy money and consequently, it loves Janet Yellen. She is considered by most analysts to be dovish. In her testimony before Congress this week she stated that tapering is not steadfast. If conditions deteriorate, the Fed will pause.

I’ve been mentioning that a debt ceiling deal was likely. It was approved today and the “can” was successfully kicked down the road. Politicians want to stay out of the headlines. This uncertainty has been removed, but the outcome was highly anticipated.

The President has delayed Obamacare by one year for small businesses. This was bullish and it should help employment. Didn’t Republicans get slammed for suggesting this a few months ago?

Earnings season has been good and profits are up 7.5%. Cash flows are at record levels and companies are buying back stock.

Economic conditions are mediocre. China’s growth rate is 7.7%, but it is slipping. Today we learned that auto sales were only up 6% and that is a third of the growth we saw in the prior month. Trade balance projections for 2014 were notched down. Banks reported that non-performing loans are on the rise.

Europe is showing some signs of life. That tenuous rebound needs to continue.

US economic growth has been impacted by severe weather conditions. Our true growth will be masked for another month. Today we learned that initial jobless claims increased by 8,000 and retail sales declined .4%.

Last year, you could close your eyes and buy dips at the 100-day moving average. That tactic worked again, but conditions are a bit more tenuous this time around.

Global credit conditions are tightening. QE has lost its effectiveness and central banks have to gradually remove the punch bowl. If they don’t, they will be painted into a corner. Given strong global growth, this would not be an issue. Unfortunately, activity is sluggish.

Emerging markets are experiencing currency fluctuations. Credit concerns are isolated for now, but that can change quickly.

I liked that the market was able to blow through resistance at $181.50 this week. That was a bullish sign. However, at the first whiff of trouble, the S&P was down 13 points overnight. We have recovered those losses and we are back in positive territory.

It is foolish to try and call a market top after a five-year rally so I won’t play with dynamite. However, if this snapback rally fails, and intermediate trend change could be taking place.

Stick with long positions and take profits along the way. We are within striking distance of the all-time high and resistance will be stiff. We have nice profits and this is going to be a tough trading year. There is no harm in banking gains. If the market breaks out, we can always get back in.

Use SPY $181.50 as your stop. If that level fails, get out of longs and take a small short position.

The reversal today was nice, let’s see if it holds this afternoon. A drift lower would be bearish.
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