Why We're Watching These Two Uncommon Moving Averages

Is a consolidation in the cards? This sentiment indicator may be flashing red

by 2/9/2013 9:28:08 AM
Stocks quoted in this article:
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Indicator of the Week: Third Straight Year of Big, Early Returns
By Rocky White, Senior Quantitative Analyst

Foreword: For the third straight year the market is quick out of the gate, gaining well over 5% in the first six weeks of 2013. The chart below shows the S&P 500 Index's (SPX) year-to-date return, as well as the annual returns for the past two years. In 2012, the index gained another 6.2% for the rest of the year, while it fell 5.4% in 2011 after the first six weeks. Next, I'll point out an indicator that was flashing red in 2011, and flashing green in 2012. Unfortunately, it currently resembles 2011.

 SPX Returns for 2011, 2012, and 2013

II Poll: The chart below shows the SPX, along with the difference between the percentage of bulls and bears, according to the weekly sentiment survey by Investors Intelligence (II). When the number of bulls is far higher than the number of bears, it's an indication of a lot of optimism in the market. Being contrarians, we believe high levels of optimism have bearish implications for the market going forward. That was certainly the case looking at 2011 and 2012.

After six weeks into 2011, the bulls-minus-bears was very near 40% (circled on the chart). The market went sideways after that, before eventually collapsing later in the year and giving back all its gains. Then, in 2012, the market was once again off to a great start, but this time the bulls-minus-bears was much less, right around 20%. The market continued higher and finished the year up about 13%. Currently, the optimism, according to this poll, is the near the 2011 level (marked by the red line).

 II Bulls-Minus-Bears vs. SPX

Hopefully, this year doesn't play out as it has in the past when using this indicator as a guide. I went back to 1990 and found years when the SPX was up at least 2% through the first six weeks of the year. Then, I tracked the returns going forward depending on whether the bulls-minus-bears was above 20% or below 20%. The table below shows the average returns are remarkably better when there is less optimism in the market. This is one indicator showing some cause for concern as the market is closing in on all-time highs.

 SPX Returns When II Bulls-Minus-Bears is Above or Below 20 Percent

This Week's Key Events: Coca-Cola, Cisco Systems, and GM Headline the Earnings Roster
Schaeffer's Editorial Staff

Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

  • There are no major economic reports scheduled. However, Lions Gate Entertainment (LGF) and Masco (MAS) are due to report quarterly earnings.

Tuesday

  • The economic round-up includes the Treasury Department budget and the National Federation of Independent Business (NFIB) Small Business Optimism Index. Meanwhile, investors will have the chance to digest earnings results from Coca-Cola (KO), Michael Kors (KORS), Blue Nile (NILE), Clearwire (CLWR), Rackspace Hosting (RAX), Level 3 Communications (LVLT), Reynolds American (RAI), Fossil (FOSL), Buffalo Wild Wings (BWLD), Avon Products (AVP), McGraw-Hill (MHP), Seattle Genetics (SGEN), Goodyear Tire (GT), Western Union (WU), and Valspar (VAL).

Wednesday

  • Retail sales for January hit the Street, along with import/export prices, business inventories, and the regularly scheduled crude inventories report. Companies stepping up to the earnings plate include Cisco Systems (CSCO), Whole Foods Market (WFM), Applied Materials (AMAT), Avis Budget Group (CAR), Comcast (CMCSA), NetApp (NTAP), NVIDIA (NVDA), TripAdvisor (TRIP), Angie's List (ANGI), MEMC Electronic Materials (WFR), Cliffs Natural Resources (CLF), Deere & Co (DE), MetLife (MET), Zillow (Z), Duke Energy (DUK), Agnico-Eagle Mines (AEM), Dean Foods (DF), Weight Watchers (WTW), Equinix (EQIX), and Dr. Pepper Snapple Group (DPS).

Thursday

  • The economic docket will feature weekly jobless claims. Wall Street can expect earnings reports from General Motors (GM), PepsiCo (PEP), Alpha Natural Resources (ANR), Barrick Gold (ABX), CBS Corporation (CBS), DIRECTV (DTV), Molson Coors Brewing (TAP), Waste Management (WM), Vulcan Materials (VMC), and Orbitz Worldwide (OWW).

Friday

  • The week concludes with the Empire State Manufacturing Index, the University of Michigan/Thomson Reuters preliminary consumer sentiment reading for February, industrial production, and capacity utilization. Campbell Soup (CPB), V.F. Corp (VFC), J.M. Smucker (SJM), and Pilgrim's Pride (PPC) will wrap up the week's slate of quarterly earnings.

And now a sector of note...

Internet
Bullish

A number of prominent web-based companies have caught our bullish attention in recent weeks, due to the winning contrarian combination of strong price action amid continued skepticism. Plus, as earnings season progresses, a number of Internet heavyweights -- including eBay (EBAY), Google (GOOG), and Netflix (NFLX) -- have rallied after exceeding analysts' expectations. Most recently, LinkedIn (LNKD) extended its winning streak in the earnings spotlight, reporting stronger-than-expected figures for the seventh straight quarter, and offering solid current-quarter estimates. Expedia (EXPE), meanwhile, fell short of consensus targets, but the subsequent decline was merely a blip amid the longer-term uptrend, with the shares recovering in short order. What's more, technical standouts like NFLX, EXPE, and LNKD stand to potentially benefit from short-covering activity, as short interest represents, respectively, 21%, 9%, and 6% of these equities' floats. There is also room for more Wall Street experts to shift to the bullish camp. Just six out of 29 analysts consider NFLX a "buy," 14 analysts maintain tepid "holds" on LNKD, and EXPE has earned just eight "buy" or better endorsements out of 18 total recommendations. During the near term, analyst upgrades or price-target hikes could spur additional buying demand for these outperformers. The First Trust Dow Jones Internet Index (FDN - 42.95) tracks a basket of roughly 40 Internet names -- including all of the aforementioned companies. The FDN continues to consolidate near all-time highs atop its 10-day moving average, and the $42 level remains important; this area is 50% above the ETF's October 2007 high and October 2011 low.

 Daily Chart of FDN since November 2012

Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.

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