February 26, 2013 at 09:34 AM EST
Market is no longer short-term overbought–now what?
Tuesday, February 26, 9:25 a.m. For some weeks now it’s been obvious and widely noted that the U.S. market and global markets were short-term overbought to a degree that made a pullback to alleviate that overbought condition likely. Last week’s weakness and the big sell-off yesterday have made considerable progress toward taking care of that [...]

Tuesday, February 26, 9:25 a.m.

For some weeks now it’s been obvious and widely noted that the U.S. market and global markets were short-term overbought to a degree that made a pullback to alleviate that overbought condition likely.

Last week’s weakness and the big sell-off yesterday have made considerable progress toward taking care of that overbought condition in the U.S. market.

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A number of important global markets that were in the same short-term overbought condition have led the way, and perhaps ominously did not find support at their 50-day m.a.

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The question on these markets is whether the short-term technical indicators are becoming short-term oversold enough to reverse to the upside yet.

The short-term gyrations don’t mean much unless the intermediate and longer-term indicators indicate a short-term move is likely to worsen into something more serious.

But the market is close to another important short-term juncture.

The next ‘monthly strength period’ is due to begin tomorrow and to run through the following Wednesday. So we shall see.

The outcome could have an effect on the currently tumbling safe havens of gold and bonds.

Italy’s election, sequestration concerns, and weaker economic reports .

In my weekend newspaper column How Long Can Economy’s Sweet Spot Last This Time- I noted that “this sweet spot in the recovery is not likely to last much longer before running into its next rough patch”.

I noted the similarity to the last three years when the the market was similarly in an impressive favorable season rally that carried it to then new highs, after the economic recovery which had stumbled each summer got back on track each time.

But each time the effect of QE stimulus faded, the recovery stumbled again and the stock market topped out at the end of the favorable season into a double-digit summer decline.

And here we are with the market at yet another new high, the end of the favorable season approaching, and warning signs beginning to appear again, as they have in the early spring in each of the last three years. 

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In recent writings I have said I expected this winter rally to also only last until the end of the market’s favorable season as measured by our Seasonal Timing Strategy, and then for a setback in the spring and summer.

I said that it was not yet possible to see the catalysts that would result in a setback, that it could be brought on by any number of problems, “the slowing effect of government spending cuts to bring budget deficits under control, or the Fed beginning to remove the stimulus punch-bowl, a return of the eurozone crisis, the U.S. economy stumbling again, or inflation finally beginning to show up.”

And the last few days have seen several of those potential catalysts beginning to appear.

We’ve had the indications that Washington will let the sequestration spending cuts take place; talk in the Fed’s FOMC minutes that the Fed is beginning to consider shortening its promise on how long its will continue to run its QE program; unexpected negative economic reports; and yesterday the panic created in Europe over the election in Italy that apparently resulted in fears of a grid-locked government again, just as hopes were high that progress was being made.  

In recent U.S. economic reports, consumer confidence fell unexpectedly in January (the report for Feb will be released at 10 a.m. this morning). 4th quarter GDP was revised down to –0.1% (the next revision will be released Thursday morning). Yesterday it was reported that the Chicago Fed’s National Business Activity Index fell to -0.32 in January from +0.25 in December. (But the 3-month m.a. rose to +0.3 in January from +.23 in December). The Dallas Fed’s Mfg Index declined from 12.9 in January to 6.2 in February.

So the question really is “How long can the economy’s sweet spot last this time.”

Subscribers to Street Smart Report: In addition to the information, charts, and signals in the “premium Content’ are of this morning’s blog, there will be an in-depth mid-week update on the U.S. market, gold, and bonds tomorrow in your secure area of the Street Smart Report website.

Yesterday in the U.S. Market.

A dramatic downside reversal day. The Dow was up as much as 81 points in the morning and then reversed sharply to the downside to close down 216 points, closing on its low. And volume picked up to 0.8 billion shares traded on the NYSE on the down day.

The Dow closed down 216 points, or 1.6%. The S&P 500 closed down 1.8%. The NYSE Composite closed down 2.0%. The Nasdaq closed down 1.4%. The Nasdaq 100 closed down 1.3%. The Russell 2000 closed down 2.2%. The DJ Transportation Avg. closed down 2.2%. The DJ Utilities Avg closed down 1.2%.

Gold closed up $13 an ounce at $1,593.

Oil closed down $.90 a barrel at $92.23.

The U.S. dollar etf UUP closed up 0.4%.

The U.S. Treasury bond etf TLT closed up 2.0%.

Yesterday in European Markets.

European markets mostly closed up yesterday. The overall Europe Dow closed up 0.8%. Among individual countries, the London FTSE closed up 0.3%. The German DAX closed up 1.5%. France’s CAC closed up 0.4%. Ireland closed up 0.4%. Italy closed up 0.7%. Spain closed up 0.8%. Russia closed up 0.6%.

Asian Markets closed down last night.

The Asia Dow closed down 1.0%.

Among individual markets:

Australia closed down 1.0%. China closed down 1.4%. Hong Kong closed down 1.3%. India closed down 1.6%. Indonesia closed down 0.7%. Japan closed down 2.3%. Malaysia closed down 0.2%. Korea closed down 0.5%. Singapore closed down 1.1%. Taiwan closed down 0.8%. Thailand closed down 0.6%.

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Markets This Morning:

European markets are down sharply this morning, catching up to the rest of the world’s plunge yesterday. The Europe Dow is down 2.2%. Among individual countries the London FTSE is down 1.1%. The German DAX is down 1.5%. France’s CAC is down 1.6%. Norway is down 0.5%. Portugal is down 1.4%. Spain is down 1.9%. Switzerland is down 1.4%. Italy is plunging 3.6%. Russia is down 1.1%.

Oil is down $.15 a barrel at $92.96.

Gold is unchanged at $1,593.

This Morning in the U.S. Market:

This week has a heavy schedule of potential market-moving economic reports including New Home Sales, Consumer Confidence, Durable Goods Orders, the next revision of 4th quarter GDP, etc. To see the full list click here, and look at the left side of the page it takes you to.

Yesterday’s reports were that the Chicago Fed’s National Business Activity Index fell to-0.32 in January from +0.25 in December. But the 3-month m.a. rose to +0.3 in January from +.23 in December. And the Dallas Fed’s Mfg Index declined from 12.9 in January to 6.2 in February, suggesting growth continued but at a slower pace.

This morning’s reports so far are the FHFA House Price Index which showed home prices rose 0.6% in December. And the Case-Shiller HPI Index showed prices on a seasonally adjusted basis were up 0.9%.

Still to come are New Home sales, Consumer Confidence, and the Richmond Fed’s Mfg Index, all of which will be released at 10 a.m.

Our pre-open indicators have improved with the reports.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being up 75 points or so in the early going this morning.

To read my weekend newspaper column click here: How Long Can Economy’s Sweet Spot Last This Time-

Subscribers to Street Smart Report: There will be an in-depth mid-week update on the U.S. market, gold, and bonds tomorrow in your secure area of the Street Smart Report website.

I’ll be back with the next regular blog post on Thursday morning at 9:25 a.m.

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