For those who follow Chinese astrology, 2014 is the year of the wood horse, which is supposed to be one of wealth and success. MoneyShow’s Tom Aspray takes a technical look to see whether investors can expect it to be like a previous wood horse year, 1954, when the Dow gained almost 40%.
Last week started off with fears of Armageddon as the contagion from the emerging markets hit the developed stock markets quite hard. The S&P 500 futures lost 44 points by mid-afternoon, Monday, with little in the way of a bounce. The gloom seemed to spread over the next two days as several economists tempered their bullish economic outlooks for 2014.
The weaker-than-expected Factory Orders last Tuesday did not help much though stocks did stabilize. Investors pulled a record of $8.8 billion from stock funds and ETFs during the week ending February 5, according to Lipper, Inc. Many moved into the perceived safety of the bond market with $10.7 moving into the bond funds and ETFs.
Thursday’s gain in the Dow was the best of the year, so traders, as well as investors were understandably nervous going into the monthly jobs report last Friday. Though the stock index futures dropped initially on the report they soon reversed course to close the day sharply higher. Many investors are now more confused than ever as they don’t know whether they should be buying or selling and probably can’t decide how much to have in the stock market as we head into 2014.
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Many of you may be aware that according to the lunar calendar, the New Year began on January 31 with the year of the wood horse. Each year an animal is paired with one of the elements. In 2002 it was the water horse, which was preceded by the fire horse in 1990. Other recent horse years were 1978, 1966, and 1954. The investment banking and asset management firm, CSLA, has released its tongue in cheek annual Feng Shu Index report for the New Year.
Both 1978 and 1954 were pretty good years for stocks following the lunar calendar, and in 1954, the Dow had one of its best years ever, gaining close to 40%. That kind of year in 2014 is beyond everyone’s expectations, even mine.
The technical outlook has improved as it is no longer overbought and the sentiment has also become more negative, which was needed before stocks could mount a sustainable rally. Still, there are no clear signs yet that the correction is over, but the longer-term analysis continues to indicate that this correction is a buying opportunity.
I still think that 2014 will be a year when the January barometer will be wrong, and I feel even more confident that at some point the S&P 500 will be up at least 10% for the year.
The recent drop in bond yields has gotten quite a bit of attention and those who switched into bonds last week are obviously hoping that rates will move even lower. The daily chart of the 10-year T-note yield shows what could be a double top formation as indicated by points 1 and 2. It will take a decisive drop in yields below 2.50%, line a, to confirm this interpretation.
The longer-term analysis suggests to me that this is more likely a continuation pattern or a pause in the trend towards higher yields. If so, it will eventually be resolved by a convincing move in yields above the 2013 highs. The current range could last for some time, though the daily MACD analysis could turn back to positive in the next week or so. This may mean yields will move back towards the upper boundaries of their recent range.
The European Central Bank stuck with its low rates last week and apparently plan to keep them low for some time. This will be a plus for the German and Italian bond sales next week. Late last week, a German court questioned the legality of the ECB’s bond-buying program, but so far, the markets are not worried.
There was also no change from the Bank of England as they did not want to take any chance that rising rates would stall their recovery. As reported by the Wall Street Journal “The bank's ‘forward guidance’ states that officials won't consider raising the interest rate until the unemployment rate fell to at least 7%.” Their main interest rate has been at 0.5% since March of 2009.
Many were disappointed that the ECB did not lower rates as the Eurozone inflation rate dropped to 0.7%, which is well below their target of 2%. The consumer inflation rates of the US, Eurozone, China, and the UK still show longer-term downtrend (see chart). Japan is the only exception as its consumer inflation moved above the zero level in 2013. These low inflation numbers and the threat of deflation are something the central bankers and investors should not ignore.
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