FREDAlert!
Volume 6, Issue 1
February 4, 2014
We have had enough questions to publish a quick alert, and of course we will publish the Midweek Review on Wednesday.
First, stocks: SPY fell below the 177.30 support, and has quickly moved down to the next area of support. One of the reasons we have suggested a cash position is that when the %bears is low as it is now moves happen much more quickly, giving little time to make decisions. Our discussion of CVX, AAPL, and AMZN in Monday’s weekly alluded to this and now we are seeing this in the indexes. So, where are we now? First, realize we are already back where stocks were in October 2013. Second, we have been indicating that the risk of an 8% – 12% correction has been growing. Friday we suggested deploying about ¼ of the cash we have held. There is support between 173 and 170 and an 8% correction would be roughly 170. Below 170 would be a concern. A 12% correction would be around 163, also support. This means that a down open would put us in the range of the correction we have been expecting and aggressive traders could add a bit on a down open. We have no real buy signal here and sentiment is still a concern. CNBC was filled with people suggesting this is “healthy” – also a concern. Ideal would be some choppiness and time in this area to give sentiment a chance to improve. For now, we think the call for a 15% correction is too extreme. It is, however, too soon to make an accurate forecast for a bottoming area, we need to see more trading – but those are numbers we are looking at.
Second, other markets: EEM has closed below last week’s lows, and aggressive traders who tried this should be out on this close – use risk management here if you do not just sell – we would hold baseline but not aggressive positions. This is why we did not adjust the timing models in emerging markets. Bonds continue to rally and should test110 and remain a hold. The Yen (FXY) has advanced and is slightly above the 96.20 area, and a test of 97.20 seems likely. The Japanese ETFs could fall a bit more, as weekly stochastics are oversold but have not turned up.
What to do now? First, be patient as we have been looking for corrective behavior and advisors should have cash to take advantage of this. Add a bit in this area so that our 20% cash positions are reduced to 15% or so if this has not already been done. Tuesday’s action is important and we will write about this in the Midweek.
