Largest Solar Storm in 5 Years: Bad Omen for the Stock Market?

Last week on Tuesday (Mar. 6^th), the S&P 500 dropped more than 1.5 percent, its first 1 percent-plus drop in three months. The reasons for the drop were three-fold, but each reason disappeared by the end of the week:

• Fear that Greece would not convince a minimum of 75 percent of private bondholders to “voluntarily” accept a 53.5 percent reduction in the value of their Greek government debt holdings. A failure to meet the 75 percent threshold would have forced Greece to make a “hard” default instead of a “selective” default and the European Union would not have agreed to provide any additional bailout money.
  • As it turned out, 85.8 percent accepted the deal, so a hard default was avoided.
• Federal Reserve Chairman Ben Bernanke testified before Congress that the U.S. economy was improving, but failed to hint that any additional monetary easing would be forthcoming (i.e., no QE3).
  • But on Mar. 7^th the Wall Street Journal reported that the Fed was considering “Operation Twist Part 2,” which would involve buying more long-term mortgages and U.S. Treasuries but then borrowing back the money used for the debt purchases, so money supply would not increase.
• China cut the nation’s economic growth target for 2012 to 7.5 percent from the 8 percent target that had been in place since 2005. If 2012 growth actually came in at 7.5 percent, it would be China’s lowest annual growth rate in 22 years. 
  • Economic data released later in the week was weak, but reassured investors that a soft landing was more likely than a hard one. Furthermore, speculation arose that the Chinese central bank would respond with monetary stimulus.
  • News that India was cutting bank reserve requirements also buoyed investor hopes that emerging markets were shifting from their year-long monetary tightening regime to a loosening one.

The last three trading days of last week were all up – including the largest two-day advance of the entire year — and the Nasdaq-100 (NYSE: QQQ) actually hit a new 11-year high on Friday.

The 5% to 7% market correction that investors have been waiting for just doesn’t seem ready to happen yet. A watched pot never boils? Based on investor sentiment, most investors remain worried. The Association of Individual Investors (AAII) and Market Intelligence (newsletter advisors) bullish sentiment readings are both at their lowest levels of the year (although much higher than the lows from last autumn). Similarly, the Yale Crash Confidence Index – which measures the percentage of investors who are confident that a market crash will not happen in the next six months – is near all-time lows. From a contrarian standpoint – which argues that the average investor is usually wrong – this relative bearishness suggests that stocks may head even higher.

Is Apple’s Market Cap a Bearish Red Flag?

On the other hand, investors have bid up the price of Apple (Nasdaq: AAPL) to a $500 billion market capitalization – only the sixth company ever to reach that level. According to Jason Goepfert of SentimenTrader.com, the previous five stocks to hit $500 billion didn’t perform well afterwards, nor did the general stock market. The market also seems to have trouble after hitting round numbers like the Nasdaq Composite (^IXIC) recently did at 3,000 and the Dow Jones Industrials (^DJI) recently did at 13,000.

In addition, insiders — who are often called the “smart money” — are also bearish right now, which suggests the market may be headed for a fall. According to Mark Hulbert of the Hulbert Financial Digest, insiders are selling 6.56 shares of  stock in their companies for every one share they are buying, which constitutes a “well-above-average pace” of selling that matches the bearishness insiders exhibited in April 2011 — right before the market topped out on its way to an autumn 2011 correction of 20 percent.  Throw in a Dow Theory upside non-confirmation signal from the lagging Dow Jones Transportation Index (^DJT) and there’s reason for short-term caution (i.e., next three months).

Largest Solar Storm in Five Years is a Negative for the Stock Market

The largest solar storm in five years hit the earth on Thursday (Mar. 8^th) which is bad news for the stock market over the next six days. According to a 2003 Atlanta Federal Reserve study:

People affected by geomagnetic storms may be more inclined to sell stocks on stormy days because they incorrectly attribute their bad mood to negative economic prospects rather than bad environmental conditions. The authors find strong empirical support in favor of a geomagnetic-storm effect in stock returns after controlling for market seasonals and other environmental and behavioral factors.

Keep in mind that in 11 of the past 12 years, the Nasdaq-100 has fallen at least 10 percent from its January peak price sometime during the year. The QQQs January peak was on the very last day of the month (Jan. 31^st) when it hit $60.86. A 10 percent correction would mean a QQQ value of $54.77. With the QQQs now trading at $65.02, dropping to $54.77 would require a nasty 15.8% decline. Lastly, Barron’s Magazine has an article in its latest issue entitled “The Worst of Times to Buy Stocks?” which discusses the extremely bearish predictions of Ph.D economist John Hussman and technical analyst Walter Zimmermann Jr.

Bullish Market Momentum is Undeniable

In the intermediate term (i.e., 6-9 months), you need to remain somewhat bullish – just ask James Altucher or Laszlo Birinyi — because stock-market momentum has been so darn strong (nine up weeks out of the last 10).  Before last Tuesday’s (Mar. 6^th) 1.54 percent drop, the largest one-day drop the S&P 500 had suffered in the first 42 trading days of 2012 was 0.69 percent, which constitutes the second-lowest biggest one-day drop in the past 50 years!  First and third place on the list are 1964 and 1995, respectively, which both ended their years higher by double digits (16.5 percent in 1964 and 37.6 percent in 1995). Rounding out the “top five” are 1972 and 1971, both of which were also double-digit winners (19.0 percent and 14.3 percent, respectively). In fact, according Jeffrey Saut of the Raymond James brokerage:

There have been 12 other years since 1928 where the SPX has traded higher for 30 sessions, or more, without a 1% down day. In all but one of those occurrences the SPX was higher at year’s end with a median gain of more than 15%.

U.S. Economy Continues to Improve

U.S. economic data continues to improve, although the good news is no longer surprising people — Citigroup’s Economic Surprise Index has been declining for two months straight. The latest good news was the ISM Services Index (one-year high) and the February non-farm payroll report, which showed a 227,000 increase in jobs. Job growth over the last six months has been the strongest since 2006! However, inflation-adjusted consumer spending – which is 70 percent of the U.S. economy – has shown zero growth for three consecutive months and inflation-adjusted disposable personal income actually fell year-over-year in January.

ECRI’s Recession Call Remains in Place

This begs the question: will currently weak consumer spending negatively affect future jobs growth, or will currently strong employment growth positively affect future consumer spending? According to Lakshman Achuthan of the Economic Cycle Research Institute (ECRI), employment growth is a lagging economic indicator whereas personal income and spending are leading economic indicators. Since income and spending are weakening, Achuthan expects job growth to slow markedly in the months ahead (4:27 minute mark of video). ECRI is still calling for the U.S. to enter a recession soon (if it hasn’t already) because the U.S. Coincident Index (GDP, income, sales, jobs) is at a 21-month low and:

you haven’t had a decline like that in the past 50 years without a recession following in short order.

It’s a bit humorous that Achuthan has turned to the Coincident Index for support when forecasting a recession. Forecasts are about the future and the future is supposed to be based on the Weekly Leading Index, which continues to improve and is at its highest level since mid-August 2011.

Achuthan’s “index switcheroo” sounds a bit desperate, don’t you think?

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