U.S. equities have had quite a start for the year; The Dow Jones Industrial average up 6.78%, the S&P 500 better by 6.43% and the NASDAQ Composite picking up 5.77% from 2012 closing levels.  Now what?

 The Big Picture 

Much of the strength in equities can be ascribed to a better economic backdrop.  The labor market is showing signs of sustainable strength while the housing market is gaining momentum.  Year-over-year comparisons have fourth-quarter 2012 corporate profits ahead by 5.2%, much better than the drastically lowered 1.9% estimates.   

But going forward, it may be hard to continue the upward trajectory.  Technical indicators such as relative strength indicators (RSI) are pointing to an overextended market and suggestive of a near-term pullback.  The earnings reporting season is drawing to a close with most of the good news already priced in.  The risk is that some shock to the global economic system could shake investor complacency.  Lipper reports another $4.1 billion flowed into equity mutual funds, the fifth consecutive week of net new money, as investors seek higher investment returns. 

The economic calendar gives scant support for either a breakout or a breakdown.  Readings on January retail sales will be scoured for evidence of the impact of higher payroll taxes and higher gasoline prices.  January’s export/import price index will reflect rising crude oil prices. December business sales and inventories will reveal whether manufacturers are restocking inventory in anticipation of continued economic strength.  Weekly jobless claims should continue to show a decline with the four-week moving average now at a five-year low.  January industrial production and capacity utilization figures scheduled for release on Friday should show gains as cold weather ramping up demand for heating.  While total industry capacity is rising, it remains below its long-term average, leaving lots of room for growth. 

This week sees a host of Federal Reserve officials on the speaking circuit as well as The State of the Union address by President Obama.  Jobs and the economy are rumored to be the main focus and Republican rejection to the President and his policies a foregone conclusion. 

I, Investor 

With economic progress being made despite the dysfunction in Washington, the market tone remains cautiously constructive.  Unexpected news out of Europe, China and/or the Middle East still has the power to roil the markets, but at this stage, what could surprise investors? 

That leaves us with technical levels as guideposts.  Near-term support for the Dow Industrial Average builds from 13,800 down to the December lows of 12,883.  The Dow’s resistance starts at recent highs of 14,019 and extends to the all time high of 14,198. 

For the S&P 500, support ranges from 1460 down to 1400; resistance stretches from 1518 to 1576, the all-time high. The NASDAQ composite has support from 3100 down to the 3083-3016 gap. Resistance builds above 3195 and extends to 3521.  All of the major market indices are trading well above their 50-and 200-day moving averages, affording many an entry point on pullbacks.  Several days of trading range activity will work off the overbought conditions, setting the stage for the next leg up.

Speak Your Mind