Wednesday, April 23, 2014

Investors Holding Cash Confounded By Market Action

Until today, when the S&P 500 Index declined .22%, the market had managed to move higher on the prior six trading days. The six day climb followed what some investors thought might be a correction beginning to take place in the market.
  • On April 2nd the S&P reached 1891 before declining 4% to 1816 on April 11th.
  • The six subsequent trading days saw the S&P 500 Index rise 64 points to 1880, nearly recapturing the high reached on April 2nd.
This type of trading action has been the norm for this market going back to mid year 2013. I prepared the below chart late last night and was motivated to post it here following a similar chart highlighted today by Charles Kirk of The Kirk Report. The red 150 day moving average line has served as an important support level for the market for the past year and a half.

From The Blog of HORAN Capital Advisors

Charles Kirk commented, "this is also why the short-term quant data suggests new highs versus more traditional metrics." Putting Kirk's comment another way, algorithmic trading has been "programmed" to trade these patterns. Until we see a breakdown of this pattern type trading, the markets will likely move in the direction of its current longer term trend and that is higher at the moment.

The absence of a market correction, i.e., a decline of at least 10+% has confounded some investors. A chart making the rounds on the internet today is the one below. The chart resembles the trading set ups in the shaded boxes in the above chart.

From The Blog of HORAN Capital Advisors

Further influencing investor sentiment is the trading action of stocks following their earnings announcements, like Apple's (AAPL) stock price action tonight. Apple reported earnings tonight and once trading resumed in the stock Apple's shares traded $40 higher or a gain of 8% in after hours trading. More detail needs to be gleaned from the conference call, but Howard Silverblatt of S&P Dow Jones Indices noted the stock buyback impact reduced share count by 3.4% resulting in an EPS increase for the March quarter of 15.2% versus the March 2013 quarter. Net income though only increased 7.1%. If one needed an example of a breakdown of the Efficient Market Hypothesis, this might be a good place to start.

Disclosure: Family long AAPL

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