GET SHORT

4/16/12

This week I have had limited time to do homework on a particular stock, so I’m going to do something a little different.  Instead of recommending a stock or ETF, I’m going to give you my overall market opinion and where I see things going from here. 

            While long-term I am still very bullish the stock market, in the short-term, it’s awfully difficult to get excited about this market going much higher.  The most telling sign of where things are going, is by looking at the US Treasury market, and more specifically, the 10 Year Note (the benchmark for long-term interest rates).  As all of you know, I have been very bullish and have been recommending TLT for almost a month now, which just so happens to have been about the end of the sell-off in that market.  Looking at the chart of the 10-year Note (which can easily be found on cmegroup.com), you’ll see that it’s currently trading at less than 1% off the all-time highs.  Today’s close of 131’220 is the highest close since February 2^nd and the third highest close ever.  With unemployment not looking as great as it was a few months ago and with CPI lower than expected, along with poor housing numbers today, I don’t see significant upside to the economy in the near-term, which will lead investors to the safety of US Treasuries.  Looking at the technicals, the 10-year note has traded higher for 4 consecutive weeks, so clearly all the momentum is for treasuries to continue to trade higher. 

            The second indicator to look at are the charts of the Dow and S&P.  Not only have both indices fallen below the 50 day moving average, but both indices have formed textbook bearish head-and-shoulders patterns.  Again, this is only evident in the futures charts, not the cash market.  Looking first as the S&P 500, March 27^th was the decade high of 1419.75, a day in which the market put in a shooting star (bearish technical formation occurring at the highs where the stock opens high, trades higher, usually making new highs, only to close on the lows).  That particular day helped form the head and the rest was history.  Additionally, 1389.75 is the long-term 78.6% Fibonacci retracement, which after falling through it on April 8, re-tested that level twice, and failed both times.  All of this spells trouble for the S&P.  Looking at the Dow, it’s the same story, different market. 

            The third indicator that I’m looking at is how the Nasdaq is trading, and more specifically, what has happened to Apple over the last 5 trading days.  Apple was the leader on the way up, and is and will be the leader on the way down.  With Apple already 10% off all-time highs, and I believe it has another 5% to the downside, before I can recommend buying it again, the Nasdaq will continue to drop along with the S&P and in turn, the Dow.  Looking action in the options market, there was heavy buying of puts (bearish options) in Apple, which means big investors are betting on more downside.  As Apple ran from 400-640 in a matter of months, it’s always been my belief that “where Apple goes, the market goes.”  But this downtrend extends further from Apple.  Today there was heavy selling out of another stock that has gone straight up this year, Priceline.  While both stocks are very strong and both companies are even stronger, you’re finally seeing profit taking from the leading stocks and a movement into yield like Treasuries and dividend payers like Master Limited Partnerships, ConEd, Verizon, etc… 

               The last thing I’m looking at is the chart of the dollar.  A stronger dollar is bearish for US common stocks and is often considered a safe haven, much like the treasury market.  If you look at a long-term weekly chart of the dollar, you’ll notice a massive and perfect inverted head-and-shoulders that has been building since August 2009.  If you extend out to a monthly chart, the inverted H&S is still evident, along with a rounded bottom, another very bullish technical indicator.  I see the dollar continuing to rise to 85 by the end of the year, from its current level of 79.71.             

            All this being said, I see the S&P selling off over the next few weeks to 1340 (again looking at the futures), which would be about 25 points from here.  To protect yourself on the downside, you need to be in stocks that pay out big dividends like the one’s I have previously recommended.  Continue to be a buyer of TLT until it hits new all-time highs.  Stay away from the growth stocks that have led this market higher, because they will lead the market on the way down.  Keep in mind, 20 points is just a little more than a 1% move to the downside, but would be about a 6% downside move off the decade highs, which would be a real nice correction and a great entry point to own growth stocks again. 

Jeff Lewison