MARKET BOUNCES OFF 200-DAY AVERAGE, BUT ON LOWER VOLUME -- INDEXES WILL NOW HAVE TO CLEAR 50-DAY LINES TO SIGNAL END OF CORRECTION -- EAFE ISHARES ALSO BOUNCES OFF 200-DAY AVERAGE WHILE EMERGING MARKETS REBOUND FROM IMPORTANT SUPPORT LEVELS
200-DAY AVERAGES HOLD... Despite a weak jobs report on Friday, stocks had an impressive price rebound on Thursday and Friday. That was partially due to a short-term oversold condition. Chart 1 shows the 14-day RSI line for the Dow Industrials bouncing from oversold territory near 30 (although its daily MACD lines are still negative). More importantly, the Dow ended the week back above its 200-day moving average. It wasn't the only index to do that. Chart 2 shows the NYSE Composite Index also bouncing off its 200-day average. Arthur Hill's Friday message showed the S&P 500 bouncing off a support line drawn under its June/October lows (Chart 3). The late-week bounce, however, came on lower volume which detracts from its significance. Even so, we can at least say that the market survived a important test of underlying support levels. The big question now is whether this week's bounce has staying power. All three indexes still remain below their falling 50-day line (blue arrows). They will need to clear their blue lines to signal that the January correction has run its course. [The Nasdaq is the only index to close back above that resistance line]. Foreign stocks also bounced off important support levels, especially emerging markets.
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Chart 1
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Chart 2
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Chart 3
EAFE ISHARES ALSO BOUNCE OFF 200-DAY AVERAGE... Chart 4 carries good news for foreign developed markets by showing EAFE IShares (EFA) bouncing sharply off its 200-day moving average. It also bounced off chart support along its high of last May. That's important because a broken resistance level should become a new support level on subsequent pullbacks. That's why the flat line went from red (resistance) last year to green (support) this year. The EAFE, however, still needs to clear its 50-day line to strengthen its short-term trend even more.
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Chart 4
EMERGING MARKETS BOUNCE OFF CHART SUPPORT ... My Wednesday message showed Emerging Market iShares (EEM) trying to stabilize at potential chart support along its August low. It also showed the Wisdom Tree Emerging Currency Fund (CEW) testing important chart support along 2011, 2012, and 2013 lows. Both support levels held as emerging markets rebounded, taking a lot of pressure off shares in developed markets (contributing to their late week rebound). Chart 5 shows the EEM ending the week higher after bouncing off its August low. While that's encouraging, it's important to note that its major trend is still down. The EEM needs to clear its moving average lines (red circle) to signal that this week's rebound has some staying power. Another positive sign was this week's rebound in emerging bonds -- especially those denominated in local currencies. Chart 6 shows the Emerging Markets Local Currency Bond iShares (LEMB) bouncing off chart support along its June/August lows. That bond fund has been hit especially hard by weakness in emerging currencies. There again, the bond fund needs to clear moving averages lines (especially the 200-day line) to signal that an important bottom has been reached.
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Chart 5
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Chart 6
VIX TUMBLES FROM TEST OF 2013 HIGH ... The stock market also got a break from a plunge in the VIX market. My mid-week message showed the CBOE Volatility (VIX) index testing important resistance along its 2013 intra-day highs (around 21). An upside breakout through that resistance line would have been bad for stocks. [The ability of the VIX to close decisively above the 20-21 area have often signaled the start of major downside corrections]. Fortunately, that didn't happen. The VIX tumbled on Thursday and Friday to end closer to 15. That took it and the stock market out of the yellow danger zone.
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Chart 7
THE NEXT THREAT MAY EMERGE IN THE SPRING... My December 14 message warned that 2014 was a midterm election year which is usually characterized by a major correction sometime during the year. That message suggested that the two best months to take some profits (or turn more defensive) were January and April. Of those two, April is the more significant because it ends the "best six month span" of the year that starts in November. A more recent message (January 11) suggested that a major correction was more likely between May and October. The good news is that midterm corrections usually end in major buying opportunities later in the year (usually around October). Despite the fact that the January downturn appears to have been contained, stocks are not out of danger for the rest of the year. That cautious 2014 outlook is supported by the fact the market is nearing the fifth anniversary of its March 2009 bottom in a major overbought condition. Chart 8 shows the 14-month RSI for the S&P 500 starting to weaken from a major overbought condition (over 70) for the first time since 2007. That's a caution sign that the five-year bull market is probably in need of a period of consolidation, or a downside correction. 2014 is a logical year for that to happen. The good news is that the S&P 500 has exceeded its 2007 high and is in a secular bull market. That means that any significant periods of weakness this year should be viewed as buying opportunities.
