With only two sessions remaining in January, the month delivered strong returns in the stock market. And, while the advance has been strong to begin the year, you might recall that a similar start in 2011 ended in a mixed trading year. While investor sentiment is bullish and breadth is positive, the lack of mass market participation is worrisome and opens up stocks to downside risk.
The charts of the key stock market indices remain strong, but only the blue-chip Dow Jones Industrial Average is showing a bullish golden cross, with the 50-day moving average (MA) above the 200-day MA. And, despite bullish near-term signals, the NASDAQ, S&P 500, and Russell 2000 are holding on to a death cross, in which the 50-day MA is below the 200-day MA.
A bullish event on the charts occurs after the key stock indices have peaked on three successive upward moves with lower peaks; stocks have broken higher and suggest more gains.
And, as I said, the light volume on up days is a red flag and indicates stock market risk. The end result is a bearish divergence forming between price and volume, adding to the stock market risk.
The European debt crisis continues to be a major risk factor. The talks between Greece and its creditors to reach a debt swap deal have yet to be done and there is speculation that the country will be allowed to have a form of controlled default. The problem is that this would likely send jitters through the eurozone and global markets, wreaking havoc.
My advice is to ride the upward moves in the stock market, but make sure you have put hedges in place to protect your gains. It’s also never a bad idea to take some profits.
The mining area continues to be positive in my view this year.
Metals are strong, with gold back above $1,700, while silver powered above $33.00. Copper also edged higher, hinting at an economic recovery, as the metal is used in many industrial applications and is often seen as a barometer on the global economies.
February Gold is at $1,725 and above its 50-day MA of $1,667 and 200-day MA of $1,642 on stronger Relative Strength. Gold is overbought, so look for selling pressure.
My advice to you is to buy a mixture of exploration-stage gold mining stocks along with small to large gold producers. In this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers. Buy gold and silver stocks on weakness. SPDR Gold Trust ETF (GLD) is worth a look.
I like silver as a trade, but strategist John Stephenson is extremely bullish and feels that silver is heading towards $50.00 an ounce based on a historical ratio to gold.
The March Silver is bullish and holding above $33.00. The contract is above its 50-day MA of $30.86, but below its 200-day MA of $35.79. The Relative Strength is strong, but there’s an overbought condition. Silver plays to take a look at include Endeavor Silver Corp. (NYSE/EXK), MAG Silver Corp. (AMEX/MVG), and Silvercorp Metals Inc. (NYSE/SVM).
On the energy front, increased optimism towards the global economies will drive up oil prices. The March WTI Oil is holding above the $100.00 level and at its 50-day MA of $99.45 and 200-day MA of $96.54. A bullish golden cross is holding, with the 50-day MA above the 200-day MA.
Whatever you are trading, the key is prudence and not over-committing to any one area in the stock market.