@theMarket: The Faint of Heart

It has been at best a bumpy ride for stocks this week. While events in Crimea are partially responsible, there are some underlying factors just below the surface that may have more to do with recent performance than would meet the eye.

Breadth, the number of advancing stocks versus decliners, is one variable that seems to be flashing amber to red. Most market analysts take a faltering breadth ratio as an early warning signal. Then there’s momentum. Momentum is positive when existing trends in the markets continue or accelerate. Recently, that has changed.

Take the biotech sector for example. For most of the year this sector was a darling that at its peak was up over 20 percent. Investors, believing that the area offered enormous growth based on technological innovation, (like stem cells) and new health care initiatives couldn't get enough of these stocks. This week the sector hit a brick wall. Some stocks on Monday and Tuesday were down 10-15 percent with little warnings.

Other high flyers in the technology space were also clobbered. NASDAQ, which outperformed the Dow and the S&P 500 Indexes for most of the year, also experienced a fairly steep down draft. When momentum stocks and sectors begin to falter, I pay attention.

The initial public offering (IPO) market is also an indicator that bears watching. The calendar for new offerings has been red hot. Companies are falling over themselves to go public with 10 new issues this week alone. In the recent past, these IPOs have all opened higher than their initial offering price and then went straight up from there. This week's favorite, a digital entertainment company, was crushed on its first day out of the box; not a good sign.

The phone has been ringing off the hook all week. It appears my last column on the markets triggered some concern. I wrote that the mid-term election cycle could usher in a period of turmoil and possibly a 10 percent or more decline in the stock market. Given my bullish stance on the stock market for well over a year, my forecast upset several readers.

Let me be clear. I am still bullish on the stock market over the intermediate and long-term. I just see some digestion problems between now and the end of the summer. Any paper losses readers may suffer during that time period will be regained by the end of the year. Occasional pullbacks like the one I am expecting is a necessary and expected condition of investing in the stock market. As I have said before, if you can't stomach these occasional declines, you do not belong in the stock market.

The exact timing on when and how long such a possible sell-off would occur is problematic. Some pundits are arguing it has already begun. I doubt it. We will probably rally again up to the recent highs or even beyond before stalling out again. We may well have another month or so before the markets truly roll over so there is plenty of time to adjust your portfolios in the event you want to take some defensive action.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Hanging In There

Russia's attempted annexation of the Ukraine, China's internal economic woes, the less than auspicious enrollment numbers in Obama's health care initiative are just a few of the difficulties that the stock market has had to overcome this week. Given the news, stocks are hanging in there.

There's hardly a day goes by that someone, somewhere isn't calling a top to this market. The bears are doing their utmost to get a good old-fashioned rout going but investors by and large are ignoring their overtures. On down days, the volume dries up because most investors resist the temptation to sell. Only day traders appear willing to sell the market and even they are right back in again at the first sign of an uptick.

The market's momentum is clearly higher. That does not mean we are immune from bouts of profit-taking. This week, for example, the markets hit a three week low but it appears that these declines simply set us up for another move higher.

Those who are already invested are willing to sit through this consolidation phase. Those who are not yet in stocks are increasingly willing to buy on any dips, no matter how shallow. As one client recently said, "there is no place else to go, if you want to earn a decent return."

At this point in this bull market, it is not unusual to see the big gains of last year taper off to a slow grind higher, interspersed with fits of moderate selling. Sure, some individual stocks are still accumulating big gains or losses but the indexes are for the most part trading sideways.

Given the overseas background noise, the U.S. market's ability to absorb bad news is even more impressive. Events in the Ukraine this weekend will further test the market's staying power. Russia has engineered a sham voter referendum in the Crimea on Sunday. It is widely expected that the rigged results will give Vladimir Putin an excuse to annex that region.  There is little the West can do to stop it outside of military intervention, which is not on the table.

Economic sanctions by the U.S. and Europe, on the other hand, might hurt a bit but can go only so far before Russia retaliates by shutting off Western Europe's gas shipments. I can’t help but compare Putin's actions with those of Adolph Hitler prior to World War II when he annexed Austria and several other nation states unopposed.

At the same time, investors are concerned that China, once the economic locomotive of world growth is gradually turning into at best a weak caboose. As most readers know, speculation is rampant in China and has been for years. The real estate, financial and commodities markets have reached bubblelike proportions and the government is endeavoring to deflate the excesses without puncturing the balloon. How and to what extent they are successful have implications for markets worldwide.

As for you, my readers, I advise you do nothing during these short-term tempests, regardless of whether the teapot is in this country or somewhere overseas. The issues I see on these foreign fronts simply argue for remaining here in the U.S. market, which increasingly looks like a safe haven.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Markets Turn Positive for the Year

It is official. We made a new high this week and the markets appeared to be in "melt-up" mode. So why is everyone cautious?

After almost two months of consolidation, the equity markets broke out once again, spurred by the knowledge that if the economy falters, the Fed remains ready to reverse course.

Yet, by Friday afternoon, the bears were fighting hard to ruin the party.

It was no accident, in my opinion, that Fed Chairwoman Janet Yellen's testimony before a Senate panel on Thursday was followed by a record-breaking gain in the S&P 500 Index. But by Friday afternoon, the benchmark index was barely holding its gains. True, not all the indexes have reached new highs. Dow Theorists won't feel comfortable until both the industrials and the transports also break out and confirm the gains in the other indexes.

Yellen, in her testimony, said that the central bank was studying the economic data closely. She said, "a number of data releases have pointed to softer spending than many analysts had expected. Part of that softness may reflect adverse weather conditions, but at this point, it's difficult to discern exactly how much. In the weeks and months ahead, my colleagues and I will be attentive to signals that indicate whether the recovery is progressing in line with our earlier expectations."

This is a departure from her upbeat comments over the last few weeks when she appeared more positive over the future prospects of the economy. So why did the markets go up? I believe investors assume that if the economy were to slow further, the Fed would reverse its recent tapering and some argue that the Fed might even inject more stimulus into the economy.

Readers may recall that I have been expecting to see a spate of disappointing numbers in the weeks ahead as the country continues to suffer from the impact of the Polar Vortex. Today's GDP data, for example, indicated the economy in the fourth quarter dropped to 2.4 percent versus 4.1 percent reported in the third quarter. Lower exports and consumer spending were the main culprits in the sluggish number.

My own belief is that once the country thaws out from this winter's deep freeze, activity will once again spurt higher. However, between now and then, the stock market may get spooked by fears that the economy is rolling over.

As for events overseas, specifically in the Ukraine, the markets have been able to absorb events without too much difficulty. Naturally, when tensions rise between Mother Russia and the U.S., one must pay attention to events. Vladimir Putin seems bound and determined to escalate the situation further but hopefully cooler heads will prevail.

There has been so much talk this week on whether the market is "topping" out that I have my doubts. I would stick with the game plan and remain invested. The worst that could happen is that we have another mild pullback and we fall back into a trading range.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Shot Across the Bow?

Interest rates have been on a downward path for almost 30 years. In May of last year, thanks to the Fed's taper talk, that direction has reversed. This week it was revealed that some Fed officials are actually discussing when to hike interest rates.

The discussion took place late last month during the Federal Open Market Committee meeting presided over by the new Fed chairwoman, Janet Yellen. Like her predecessor, Ben Bernanke, Yellen appears in no hurry to raise short term interest rates and has told the markets as much. Most investors, guided by past Federal Reserve comments, are not expecting a hike in interest rates until the middle of next year at the earliest.

So why discuss it at all? Actually, for me, any discussion of raising rates is a fairly strong indicator that both employment and the economy are continuing to gain momentum and are expected to do so in the future. That needs to happen in order to justify the present levels of the stock market and any further advances equities may make.

I am sure that the same dissenting Fed members who, for years, have opposed further stimulus by the FOMC majority are behind this talk of hiking rates. These are the "inflation hawks" and if they had their way, the Fed's gradual tapering of stimulus would be accelerated from its present $10 billion a month decline to something more meaningful.

But moving the discussion from fewer stimuli to raising rates is a quantum leap in monetary policy.  I do not believe anyone at the Fed is seriously entertaining a hike in short term rates before the middle of next year.

In the meantime, over in the stock market a bit of profit-taking has kept the markets from achieving their objective. Recent highs are within sight. The S&P 500 Index actually came within 2.5 points of that target on Wednesday (and five points on Friday) before falling back. I would expect more of this kind of action before we reach and then break those highs.

Nevertheless, a new high will happen in the weeks ahead, but it does not mean that sunny skies lie ahead. There are storm clouds forming. Record highs will be met by more profit-taking, which will create more declines similar to the one we experienced in January. This year, as I have written in the past, will not be like 2013. There will be more volatility and more declines, although by the end of the year the markets will be higher than they are now.

So far, I see little to fret about. Investor sentiment has returned to a more reasonable level. The economic data, despite the weather effects, continues to show improvement.  The technical charts indicate we are still in a bull market so what is the worst that could happen here? At the worst, we may see another sell off and establish a new trading range once we hit a new high. We could meander up and down for a few months. That would not be unusual since stock markets go sideways over 60 percent of the time. If that is what the future holds, I’ll take it and be satisfied to simply buy and hold.  

In the meantime, over in the stock market a bit of profit-taking has kept the markets from achieving their objective. Recent highs are within sight. The S&P 500 Index actually came within 2.5 points of that target on Wednesday (and five points on Friday) before falling back. I would expect more of this kind of action before we reach and then break those highs.

Nevertheless, a new high will happen in the weeks ahead, but it does not mean that sunny skies lie ahead. There are storm clouds forming. Record highs will be met by more profit-taking, which will create more declines similar to the one we experienced in January. This year, as I have written in the past, will not be like 2013. There will be more volatility and more declines, although by the end of the year the markets will be higher than they are now.

So far, I see little to fret about. Investor sentiment has returned to a more reasonable level. The economic data, despite the weather effects, continues to show improvement.  The technical charts indicate we are still in a bull market so what is the worst that could happen here? At the worst, we may see another sell off and establish a new trading range once we hit a new high. We could meander up and down for a few months. That would not be unusual since stock markets go sideways over 60 percent of the time. If that is what the future holds, I'll take it and be satisfied to simply buy and hold.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Just About There

What a difference one week makes. All the concerns that were ostensibly responsible for the stock market's 7 percent decline in January have already been forgotten. It appears investors are bound and determined to push the markets back to the highs.

The markets were up four out of five days this week. Clearly, by Friday, the averages seem to be running on fumes so a bit of a pullback would not come as a surprise. Several technical indicators are screaming overbought conditions. Yet, short sellers beware. It is going to remain very difficult to make any money betting against this market.

The question you may be asking is what happens once we regain the highs. Do we forge ahead or will there be a period in which the markets trade in a range? The likely scenario is a range bound market for a few months as the fundamentals catch up to the price level of these equity indexes.

This earnings season did nothing to heighten expectations that companies will be able to continue beating estimates. Less than half of all companies reporting so far have beat estimates. Most came in on the money, while a minority failed to live up to expectations. That would make this quarter's numbers a net neutral.

Naturally, just about every company that has disappointed has blamed the weather for their results. Even though this winter's brutal storms have definitely impacted American businesses' bottom lines, I suspect it is an all-too convenient scape-goat but it may give us hints to what is ahead.

Most economic data reflects what has happened in the past, so I suspect that we will see some disappointing numbers over the next month or two. There will be the usual debate among pundits on whether that weakness reflects a one-off, weather-related slow-down or something more threatening such as a slowdown in underlying economic growth. It could furnish an excuse for the markets to slow down or even mark time until the future is a little less snow packed.

I say hogwash to those fears (if they occur). The economy is growing and will continue to grow throughout the year. If there is any weakness in the stock market because of a perceived slowdown, that, in my opinion, would be another opportunity to buy the dip and nothing more.  

In the meantime, you may have noticed that the politicians in Washington are playing nice. Color me cynical, but this week's passage of the debt ceiling is all about mid-term elections and nothing more.

 Republicans and Democrats are desperately trying to repackage their ineptitude before November. Both sides are hoping that if they drop their penchant for confrontational politics now, the voter will actually believe they are turning over a new leaf and should be given a ninth or tenth chance to perform the duties they were elected to perform. It is all smoke and mirrors and you deserve what you get if you fall for it.

The S&P 500 Index is only 12 points away from its former high. If you were thinking of putting new money to work this week, I would hold off and see what happens. We could very well drop back to 1,800 or a little lower so keep your powder dry for now.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.