On Friday, SPX fell over 23 points, while the Dow declined over 210 points, and Nasdaq fell about 55 points. Oil rose $1.52 to close at $68.35 a barrel. Earnings generally only met expectations, after the market became overbought, and recent economic reports gave mixed signals. Moreover, SPX, the Dow, and Nasdaq have been creating bearish "megaphone" patterns (of higher highs and lower lows), which suggest the market will fall further. Recent economic data indicate the housing market is slowing and production costs are rising. Moreover, the unemployment rate fell below 5%, which is typically inflationary (NAIRU, the Non-Accelerating Inflation Rate of Unemployment is estimated to be 5%). Also, capacity utilization is rising. Furthermore, a shrinking current account deficit may be inflationary (e.g. when exports rise and imports fall). Inflation has risen somewhat, although it remains benign. Nonetheless, there are indications of economic strain (e.g. through decreasing returns to scale and diminishing marginal productivity), which will lower profit growth and accelerate inflation. Ultimately, profit growth drives the stock market. The first chart is an SPX daily chart. Major resistance levels are around 1,275, i.e. a previous high, which was recent support, and the 20-day MA, which is also the middle of the Bollinger Band. SPX closed slightly above the 50-day MA. However, it closed slightly below the uptrend line of the recent rally. Major support levels are around 1,246, i.e. a previous high, which was prior support (see circles), the lower line of the Bollinger Band, and the downtrend line of the megaphone pattern. If SPX fails to hold 1,246, or slightly below that level, the 200-day MA, currently at 1,217, and 1,200 are next major support levels. The megaphone pattern indicates 1,246 will not hold. The second chart is a same period OIH chart. OIH rose about 25 points this year, on top of big gains last year, because of rising oil prices, strong earnings of oil stocks, and perhaps on anticipation of the OPEC meeting, although oil inventories have risen. A large risk premium has been built into OIH, in part, because of potential supply disruptions from Iran and Nigeria, which are major oil producers. Consequently, OIH has the potential to fall over 10 points short-term and over 20 points intermediate-term. Energy stocks represent about 15% of SPX. On Friday, OIH closed above 150 and created a bearish spinning top. Moreover, it closed slightly above the upper Bollinger Band. Major support levels are just above 136, i.e. previous high, and in the mid-120s (see circles). The Federal Reserve has tightened the money supply over the past 18 months, and raised the Fed Funds Rate 25 basis points at each of the past 13 consecutive FOMC meetings. Monetary policy is now "data dependent," rather than an automatic removal of accommodation. The market expects another 25 basis points hike January 31st and has priced-in roughly a 50% chance of another hike in March. Consequently, uncertainty about monetary policy may increase over the next month or two, which may be negative for the market. Also, each economic report will have a greater influence on the market and generate greater volatility. Next week is another heavy earnings reporting week, the next OPEC meeting is January 31st, and Bernanke replaces Greenspan after the FOMC meeting January 31st, which should contribute to volatility. Charts available at PeakTrader.com Forum Index Market Overview section. |
