Dallas, TX
January 31, 2012, 08:00 EST		 Dr. Joe Duarte's Market I.Q.


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Short Term Seasonal Factors Could Extend Rally A Few More Days
What's Hot Today:
U.S. stocks seem ready to try a bounce attempt on Tuesday.

Economic Calendar
  • ICSC-Goldman Store Sales 7:45 AM ET

  • Employment Cost Index 8:30 AM ET

  • Redbook 8:55 AM ET

  • S&P Case-Shiller HPI 9:00 AM ET

  • Chicago PMI 9:45 AM ET

  • Consumer Confidence 10:00 AM ET

  • State Street Investor Confidence Index 10:00 AM ET

  • 4-Week Bill Auction 11:30 AM ET

  • Farm Prices 3:00 PM ET
News For Thought:

Debt collectors get squeezed. According to The Wall Street Journal: "The Federal Trade Commission intensified its crackdown on the booming debt-collection industry, announcing a $2.5 million settlement with a company for allegedly coercing borrowers into paying debts they no longer legally owed."

S & P threates to cut ratings of G-20 nations..on health care costs. According to Reuters: "Ratings agency Standard & Poor's warned it may downgrade "a number of highly rated" Group of 20 countries as of 2015 if their governments fail to enact reforms to curb rising health-care spending and other costs related to aging populations."

Small business loan demand is growing. According to CNBC.com: "Loan demand from small businesses is at its highest level since 2005, according to a new Fed survey out today. Overall, banks classified loan demand as “somewhat stronger.”" According to the report: "Changes in customers’ needs relating to inventory, accounts receivable and mergers and aquistions were all cited as reasons banks saw a change in demand for loans. The survey also noted that banks that had weaker demand for loans from small businesses said their customers cited less need for capital investment."

Short Term Seasonal Factors Could Extend Rally A Few More Days
The Month Of February Could Be Very Difficult For Stocks
The market could stage a traditional turn of the month rally of some sort in the next few days. But more and more companies are starting to turn negative on their outlook making life potentially interesting in the next few months.



Chart Courtesy of StockCharts.com


The S & P 500 (SPX) made some nice gains in the month of January but has started to stall. The resistance band between 1318 and 1325 has proved to be a stout barrier to the advance. But the rally could still have a few days if the normal seasonal tendencies exert themselves at the turn of the month. That's the period that encompasses the last trading day of the month and the first five days of the new month. That means that starting today, and over the period extending until Monday the 6th of February, the odds favor higher stock prices, if the seasonal pattern holds.

The seasonal pattern has been less reliable over the last year than it has been in the past. But so have other seasonal and cycle based tendencies and indicators. Much of the time, after these types of trends veer off the mark, they tend to return toward their mean. So, we'll see where things go.



Chart Courtesy of StockCharts.com


The Nasdaq advance decline line (NAAD) took a bit of a hit on Monday, and will look to recover. If this line can make a new high over the next few days, the up trend will most likely remain intact.



Chart Courtesy of StockCharts.com


The Nasdaq Hi-Lo line (NAHL) continued its rise on Monday, a sign that momentum to the up side has not been broken, yet. If this line rolls over, especially along with the advance decline ratio, it would be signaling that the rally would most likely be over. Something else to watch is what the small and midcap stocks do. In the last couple of weeks, the smaller stocks have begun to lead the way higher while the blue chips in the Dow Jones Industrial average have begun to lag. That's not an unhealthy market by any means. Yet, on Monday, the small stocks fell a bit more than the S & P 500 on a percentage basis. We'll be watching that dynamic as well.

There is a rising sentiment in the air that the best part of the "recovery" may have past, and that a harsher reality lies ahead. There are more people working than there were a few months ago. But there are still not enough of them. And those who are working tend to be working for less, with fewer benefits, and fewer prospects. The uncertainty of the upcoming U.S. presidential election continues to weigh on the potential for economic activity. And the weight of the unknown is starting to seep into the mainstream, as health care reform, higher taxes, and the potential for no retirement for many reaching retirement age is increasingly clear.

Thus, the short term may be tolerable, but the longer you look out, the hazier and potentially unpleasant things become.

Conclusion

The stock market rallied over the last few months for multiple reasons. One is that the November to January time frame is a seasonally good time for a rally. There is something about the end of a bad year and the hope that something good will come in the next year that moves stock prices higher more often than not.

Yet, the enthusiasm has to be sustained by reality at some point. And the current reality is that things aren't likely to get much better for a long time. Nothing has really changed in the world. Europe is sinking deeper into its economic mess. The Middle East is in the middle of something completely unpredictable. China continues to advance as a world power. And U.S. politicians are more concerned with keeping their jobs than with doing the right thing.

Corporations are taking care of themselves and their upper management, while buying back stock at high prices instead of expanding plants, advancing technology, and hiring more workers. And people are walking around with glazed eyes, just hoping that some kind of miracle saves them.

The translation into market terms is simple. November to January is often a period where a market rallies. By February, if what the market is betting on doesn't materialize, the sellers tend to gain the upper hand.

This is what we see on a daily basis in the real world, people are starting to get tired and to lose hope again. And this is what the market is starting to see as well. What it means is that this rally is now in trouble and that we should all be very careful with any long positions.

When you understand the big picture, the next step is how to survive and profit from what lies ahead. That's why we recommend: "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.

 

Market Moves - Stock Of The Day
General Electric (NYSE: GE) Is Showing Signs Of Topping Out
Shares of General Electric (NYSE: GE) have had a nice run in the last few months but are starting to look tired.



Chart Courtesy of StockCharts.com


GE and other high yielding conglomerates have had a nice run over the last few months. The combination of low bond yields and the low dollar have made these companies attractive to investors seeking income and also to those looking for companies that are earning big money.

But, the stock's 3.6% yield may not be enough to hold investor's attention after a 36% rally from its October bottom. This would be especially true if the U.S. dollar starts to stabilize or rally, which it seems as if it could do.

U.S. Treasury bond yields have most likely bottomed out, although a rise in yields has had several false starts. But, if bonds become less attractive, rising yields could take away an incentive to own companies like GE, which pay decent dividends.

Instead, investors would start to look for growth and that would most likely favor small to midcap stocks. We think GE has topped out.

For more details on how analyze intermarket relationships and how to use technical analysis in your daily portfolio managmement buy "Market Timing For Dummies" and "Trading Futures for Dummies." Visit our bookstore.

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