Archive for November, 2013

Is There Any Limit To The S&P 500 Rally?

Posted in The S&P 500 Index (SPX) on November 21st, 2013 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

With all-time daily highs scored with regularity since October 9th , the question now on the S&P 500 Index (SPX) is: Where is key resistance and will that level somehow trigger sellers to take profits? This is a particularly good question at the moment since there is a sense that a race to get performance before the books are closed at year-end is forcing the hands of some investors to buy in a form of a capitulation. Some call this phenomenon a melt-up.

From a technical point-of-view, resistance does appear to be within reach when looking at a weekly S&P 500 (SPX) chart on a semi log format. It shows that the top of an upward sloping trading “channel” and an upward sloping trend line converge at the 1,830 level with overbought conditions clearly present.

That being said, bullish price action in equities has broadened out to both mid- and small-cap stocks, which is a positive sign. A reversal to upside in emerging market equities has also been ignited. Moreover, dovish comments made by Janet Yellen at her nomination hearing last week were clearly equity-friendly since she appeared to push out the prospect of a taper to a later date, or at least to a time when the economy looks less fragile.

In any event, the end of the 2013 calendar year is quickly approaching highlighted by a concurrent rise in the level of the S&P 500 Index. Perhaps that combination of events will eventually result in some profit-taking near the 1,830 resistance area that could, in turn, lead to a tradable consolidation.


Are Transportation Stocks About To Get Derailed?

Posted in Dow Jones Transportation Average (DJT) on November 11th, 2013 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

The Dow Jones Transportation Average (DJT) closed the week trading near an all-time high, but is also approaching a test of long-term channel-top resistance at the 7,200 level. This upward sloping channel-top (on a semi-log basis) dates back to February 1998 and has contained all previous rallies. Since the DJT is considered to be a leading indicator of both the economy and the stock market, a failure to rise above 7,200 could suggest that a period of economic cooling and equity price consolidation could be on the horizon.

Although a number of transportation stocks are concurrently approaching their respective highs, all are in overbought conditions and appear to be stretched. They include: Kansas City Southern (KSU); Kirby Corp. (KEX); GATX Corp. (GMT); FedEx (FDX); United Parcel Service (UPS) and others. Some are forming bearish Head & Shoulders patterns like Union Pacific Corp. (UNP).

Supporting the strength in transportation stocks on Friday was an unexpected jump of 204,000 in non-farm payroll. That, as well as a better-than-expected 2.8% rise in Q3 GDP  appeared to move up the time-table of the taper occurring in December 2013 rather than in March 2014, however. While yields on U.S. Treasury 10-year notes did rise by 13.3bpt to 2.746% on Friday, a knee-jerk drop in equity prices did not. For the time being, that response should be seen is a big plus for equities.

That being said, as good as these economic reports were, the November 1st report of  a decline in October PMI to 51.1 from 52.8 did not presage a ramp up in economic growth. A rise in European unemployment to a record high of 12.2% along with a tiny rise of 0.7% in Eurozone inflation also was a concern to global growth and prompted Mario Draghi to cut short-term interest rates to a record low reading of  0.25% from 0.50%. Moreover, the sharp rebound in stock prices and rise in 10-year yields on Friday came as a result of a 204,000 rise in non-farm payroll, but clearly not because an outsized decline in total civilian employment, which shrank by a sobering 720,000 jobs (even when including the 204,000 figure). That oddity in the employment data, however, could due to the government shutdown experienced earlier in October and is likely flawed. If so, closer attention to future revisions should be paid.

Over the short-run, the wealth effect of  record high stock prices coupled with declining gasoline prices could keep the economy buoyed in coming weeks including the holiday travel and shopping season. In turn, that could help transportation stocks move higher still. Nevertheless, a failure to rise above the 7,200 level on the Dow Jones Transportation Average coupled with a rise mortgage and/or interest rates could be a warning that growth expectations for next year could fall short of current hopes.