The economic mood music has certainly hit a few bum-notes just lately. The US jobs report on Friday, 5 April was the worst since May 2012. And the Citigroup Economic Surprise indices - which measure whether economic data comes out better or worse than expected - have turned downwards for America, Europe and Emerging Markets, just as they did in each of the last three years.
S&P's projected cycle-high
Timing factors are also set to turn against stocks before long. The seasonally weaker May-September period is just around the corner. Meanwhile, the powerful 17-week cycle on Wall Street is hinting at the potential for a high around 10 May. The last two scheduled turning-points in this cycle were duds. But it would be odd to get three misses in a row, at least in my experience.
FTSE flops
There are already signs of weakness in the price-action, at least in certain indices. While I ignored the FTSE 100's change-of-trend sell-signal on 27 March, it then dropped to new lows by Friday, 5 April. Likewise, the FTSE 250's buy-signal on Tuesday 2 April - which I highlighted last week - was stopped out just two sessions later. It too is now in a swing-chart downtrend. While both indices have since begun a modest recovery, the traded volume has not been impressive.
Mid-caps melt
It is not all bad, though. The US indices are still following my bullish road map. Having pulled back much more gently than the European indices, they have since rallied once more. I have been calling for the S&P to join the Dow Industrials at new all-time highs and it is on the brink of doing so, as of the close on Tuesday, 9 April. Once the 1576 level is cleared, further gains should happen rapidly.
Under the circumstances, then, I would stay bullish on stocks for now. There is room for at least one more decent heave upwards, in my view. A very modest target for the S&P exists at 1600. Likewise, I can see the Dow heading for 14963. I dare say they can go rather beyond these levels, although this may have to wait until after whatever shakeout we are destined to experience in the weeks ahead.
While I am not expecting a severe correction, I should really be ready to do some short-selling this time round. I largely sat it out during last summer’s decline, as I was firmly of the belief that the pull-back would be mild and that the market would rebound strongly thereafter. In the event, I was correct, although I passed up some perfectly good potential trading profits by not being more aggressive.
When to short Wall Street
The key is to have a clear plan for when to short. A clutch of swing-chart sell-signals on Wall Street would certainly do the trick for me. The experience of the past three years suggests that another good moment to sell short might be when the 13-day exponential moving average crosses below the 21-day exponential moving average. For now, though, buying remains the name of the game.
Dominic is currently on annual leave until the 17th of April and will resume his daily market outlook articles on his return.
