Market Closes at New Highs – Will There Be a Melt Up?

The S&P 500 Index closed on Friday at a new all-time high of 2,110.30, up 0.7% on the week. The Nasdaq Composite was the strongest of the major stock market averages with a gain of 1.27%, riding the Apple (AAPL) wave to new bull market highs, merely 2% under the all-time high of 5,049 set on March 10th 2000.

The week was indeed choppy until Greece got a 4 month reprieve from the European Economic ministers, which triggered a robust closing rally on Friday that took the major averages to new highs. We are still bullish on the stock market for the first half of 2015 through the November elections, but see an erratic path to our 2,250 – 2,300 target zone.

The U.S. stock market was aided by the strength of economic numbers coming out of France and Germany, which mitigate the risk of worldwide deflation, which spooked some equity market participants. The European stock markets have been outperforming the U.S. markets but we are still awash with liquidity, thanks to relatively high 10 year U.S. Treasury yields currently at 2.13%. This liquidity, along with the steady growth in corporate earning ex energy stocks, should give the stock market added fuel for a move to higher highs in 2015.

With the stock market overbought and attracting bullish headlines, expect some minor pullbacks, but view them as buying opportunities in bullish Chaikin Power Gauge rated stocks in strong sectors and industry groups.

The ability of the market to shake off negative economic reports in the retail and home building sectors, sharply reduced earnings estimates for 2015 for the S&P 500 Index, coupled with lower corporate guidance, is an example of the stock market climbing a wall of worry.

Of course, earnings drive stock prices, but skeptical investors from individuals to institutions still have substantial cash on the sidelines and once again are underperforming the broad market averages. Liquidity and the performance game can trump poor economic reports, but not forever. The one bright spot is perhaps the most important. The employment picture continues to improve and hourly wages will soon begin to rise. Wal-Mart’s (WMT) announcement on Friday of wage hikes for hourly workers will put pressure on other retailers to follow suit.

What is the impact of an improving job market and rising wages?

An improving job market translates to higher consumer confidence and a willingness to spend. While that has so far manifested itself in autos, auto parts, home improvement sales and restaurant traffic, it will ultimately have a positive impact on the home building market and bigger ticket items. This is all good for an expanding U.S. economy. The sharply lower price of crude oil will also have a positive effect on consumers and industrial and materials companies that use petroleum products as feeder stock for manufacturing.

Improving hourly wage trends will also help to offset the lower commodity prices that are at the heart of the deflationary fears that garner headlines in the press.

The most likely effect of higher wages and an improving job market is that the Federal Reserve Board may raise interest sooner than their Wednesday Fed minutes suggest. As we have said many times, the first Fed rate hike is bullish as it reflects a strong U.S. economy and also helps the major banks by improving their “net interest margins” and thus, their profits from lending.

While the first rate hike consumes so much of the air time on CNBC and headlines in the press, while striking fear in the hearts of investors, the market continues to make new highs as we are about to enter the 6th year of the current bull market.

Ignore the headlines and the talking heads. As an old Wall Street saying goes, “Make money, not predictions”.

Chaikin Power Bars for Major Indexes

The Power Bar differentials for the S&P 500 Index and the Nasdaq 100 Index improved again last week in line with new 12 month highs for the major averages. The S&P 500 Power Bar differential improved from +38 to +52 which indicates a broadening participation in the move to new highs, not just an Apple (AAPL) driven market. The Power Bar for the Russell 2000 small cap Index (IWM) deteriorated slightly as the small cap stocks ran into resistance after breaking to new highs.

Image from Chaikin Analytics for Desktop © 2015

ETF Sector Update

Of the 5 Select SPDR Sector ETFs with the best potential based on the Chaikin Power Bar, only the Financials (XLF) failed to breakout to new highs. The strongest sectors based on price remain Health Care (XLV), Technology (XLK), Materials (XLB) and Consumer Discretionary (XLY). We’ve liked the Consumer Discretionary Sector based on the extra money in consumer’s pockets because of lower gasoline prices as well as the improving job market. In spite of disappointing retail sales, investors like the Sector and it should continue to lead the market higher.

The Energy ETF (XLE) did run into resistance as suggested last week, but the Utilities (XLU) failed to rally, primarily because 10 year U.S. Treasury yields spiked up to 2.13%. As investor gain confidence and move money back into stocks, defensive groups like Utilities and Beverages may run into profit taking.

Image from Chaikin Analytics for Desktop © 2015

This Week’s Earnings Reports

Although earnings season is officially over, there are a number of key companies like Express Scripts (ESRX), Comcast (CMCSA), Hewlett Packard (HPQ), Home Depot (HD), Macys (M), TJX Co (TJX), salesforce.com (CRM) and Range Resources (RRC) that report this week.

These earnings reports will give us a further window into consumer spending, technology and the energy sector.

The following table shows key stocks with bullish or bearish Chaikin Power Gauge ratings that report earnings this week.

• Monday Bull: Express Scripts (ESRX) Bear: Tenet Health (THC)
• Tuesday Bull: Comcast (CMCSA) Bear: Jazz Pharmaceutical (JAZZ), Range Resources (RRC)
• Wednesday Bull Target (TGT) Bear: Transocean (RIG)
• Thursday Bull: Ross Stores (ROST) Bear: 3D Systems (DDD)
• Friday Bull: Hospitality Prop (HPT) Bear: NRG Energy (NRG)

Be sure to run a Portfolio Health Check on your “My Stocks” list in Chaikin Analytics, or check our Upcoming Earnings Ideas Hotlist, to find companies that are reporting earnings this week and when they’re reporting.

Last Week’s Bullish Stock of the Week

Last week’s bullish stock of the week, Taiwan Semiconductor (TSM) had a mild pullback and finished the week at 24.44 down 1.5%. Any further dips, particularly under $24, should be used to buy TSM.

Bearish Stock of the Week – Yahoo! Inc. (YHOO) – 44.11

Image from Chaikin Analytics for Desktop © 2015

Yahoo! Inc. has traded poorly since reporting 4th quarter earnings on January 27th. Although this Internet giant beat estimates by $0.01, they guided lower for the 1st quarter of 2015 and showed continuing deterioration in their core advertising and search businesses. Anecdotally, I am about to shift from Yahoo Mail, which I have used for over 20 years, because of poor performance issues. I can’t be the only one who has finally tossed in the towel on Yahoo Mail.

The bigger story on January 27th, however, was the announcement of a 4th quarter 2015 spin-off of Yahoo!’s stake in Chinese internet retailing behemoth, Alibaba (BABA). This much anticipated and desired outcome for Yahoo shareholders caused many analysts to raise their price targets for YHOO to the $60 area. Why then is the stock trading at $44, down from $48 pre-earnings release?

The reason is that Alibaba stock is trading very poorly, having sold off from its post-new issue high of $120 to $85. When one looks at the charts of Baidu (BIDU), another Chinese internet giant, with a bearish Power Gauge rating, and Qihoo 360 Technology (QIHU), another bearish-rated Chinese internet and mobile company which is making new lows, a bleak picture begins to form.

Yahoo!’s stake in BABA is dropping in value and so goes YHOO. With its core business deteriorating and Marissa Mayer’s magic having lost its luster, Yahoo! No longer looks like the sure thing that investors imagined, based on its stake in Alibaba and Yahoo Japan.

More ominously, YHOO has begun to underperform the stock market based on our proprietary Relative Strength indicator. When this underperformance reinforces an already bearish Chaikin Power Gauge rating, we call this a bearish “personality change”. It is important for investors to recognize these personality changes in order to avoid staying with stale positions too long.

Sell YHOO on this little bounce off the 8% gap down, and move your money into more promising, bullish-rated stocks. If you believe that Alibaba has further to go on the downside, then Yahoo! is a good put play on the weakness in both Yahoo!’s core business and Alibaba’s weak price action.

YHOO has a bearish Chaikin Power Gauge rating that is driven by weak Industry Group strength, a lack of insider buying and lower analysts’ earnings estimates. The very bearish technicals reflect weak price action, very negative Chaikin Money Flow and deteriorating relative price performance to the market as a whole and the Internet group specifically.

This Week’s Strongest Industries

This Week’s Weakest Industries