Bear Alert For U.S. Stock Market

On Monday, April 16, 2012, one of the primary indicators I use for tracking long term trends in the U.S. stock market triggered a “bear alert,” indicating the need for caution ahead.

On My Wall Street Radar

I am a long time student of point and figure charting, a methodology that goes back to Charles Dow’s days, and one of the charts I use for long term trend changes is the Bullish Percent Indicator, depicted above, which tracks the percentage of all stocks on the NYSE that are on point and figure buy or sell signals.
 
Various alerts can be generated by this indicator and last Monday, we received a “bear alert” signal. What this means is that the BPNYA has been above 70% which is overbought and now has declined by 6% or more which triggers a new column of “Os” that indicates that supply is now in control versus demand. While not a confirmed “sell” signal, it flashes a warning that market declines and further weakness could be ahead.
 
Bear Alerts oftentimes predict major market declines and so we remain defensive moving towards May.

The Economic View From 35,000 Feet
 
While major U.S. indexes advanced slightly last week, economic news was decidedly mixed as Europe and earnings reports dominated the headlines.
 
The S&P 500 (NYSEARCA:SPY) advanced 0.7% for the week while the Dow Jones Industrial Average (NYSEARCA:DIA) added 1.4%. The Nasdaq 100 (NYSEARCA:QQQ) lost 0.2% as Apple (NASDAQ:AAPL) dropped 2.5% on Friday and is now down more than 10% from recent highs and puts the widely watched company right on its 50 day moving average just in time for its hotly anticipated earnings report due April 24th. The Russell 2000 (NYSEARCA:IWM) which tracks the important, market leading small cap sector, advanced 0.85% from last Friday’s close.

On the economic report front, good news came from Germany where business and investor confidence rose and Spain successfully navigated a widely watched bond auction. Employment data and retail  sales in Britain surprised on the upside which matched a better than expected report for U.S. retail sales. U.S. housing permits rose but existing home sales cratered.

On the negative side of the ledger, Spanish credit default swaps rose to records while its stock market plunged and Italian bond yields rose on ongoing concern over the future of Europe. The Empire State Index took a huge plunge from 20.2 to 6.6 while the Home Builders Index dropped to 25 from 28 previously and expected. Housing starts were terrible, falling to 654,000 from 694,000, industrial production was flat, and weekly jobs claims  stayed roughly flat at 386,000. Leading indicators declined to .03% from a previous 0.7% and the Philadelphia Fed report was a huge miss, coming in at 8.5 compared to last month’s 12.5 and the expected 10.8.

Looking ahead to the coming week, we have a huge week of economic reports ahead with home prices and consumer confidence on Tuesday, durable goods and the FOMC and Dr. Bernanke’s press conference on Wednesday, jobs and the Chicago Fed report on Thursday and Q1 GDP revision and University of Michigan Consumer Sentiment on Friday.

It will also be another big week for earnings with almost too many to mention. Monday brings Zions Bank (ZION) and Sun Trust (STI), Conoco (COP), Texas Instruments (TXN) and Xerox (XRX). Tuesday brings Apple (AAPL) and ATT; Wednesday brings Caterpillar (CAT), General Dynamics (GD), Corning (GLW) and Boeing (BA). Thursday brings Chevron (CVX), Coca Cola (KO), Dow (DOW), Lockheed (LMT), Starbucks (SBUX), UPS (UPS) and Amazon (AMZN). Friday sees Exxon (XOM), Ford (F), Goodyear (GT) and Newmont Mining (NEM).

In Europe, French bonds dropped ahead of yesterday’s presidential election and Italian bond yields rose for the sixth week in a row. Yesterday’s election pits Francois Hollande against Nicolas Sarkozy and investors are concerned that Hollande could win a potential May 6th runoff electing which would likely be anti Euro Dollar and European Union negative. Citigroup forecast that France’s debt rating could be cut in the next two years.

This weekend, the IMF was making headlines again as Christine Lagarde, managing director of the International Monetary Fund, said that “dark clouds” were on the horizon for Europe as the IMF added $430 billion to its “global firewall” which could need as much as $1 Trillion to meet future crises according to IMF estimates.

Bottom line:  Fundamental and technical indicators all point to choppy waters ahead for U.S. equity and ETF investors.