Stocks at Multi-year Highs, But
Watch for Some Near-term Topping

housing marketThe DOW broke above 13,000 on February 21 for the first time since May 2008, while 14,000 has not been touched since October 2007. My market view is that the upside break at 13,000 is bullish if it can hold, but the light trading volume suggests a minor bearish divergence between price and volume.

My market view is positive and suggests that more gains may be coming, albeit stocks are technically overbought on the charts and are subject to resistance selling on upward moves.

The market view remains bullish; a golden cross is in effect, with the 50-day moving average (MA) above the 200-day MA. The buying bias continued into the first two weeks of February with technology and small-cap stocks driving the broader market. The NASDAQ is up over 13%, while the Russell 2000 is up nearly 12%, above the 8.52% for the S&P 500 and the 6.36% for the DOW.

Technology has provided some strong leadership to the market, with the NASDAQ eyeing 3,000 and a decade high. My market view is to be careful, as the chart looks overextended in the near term.

The S&P 500 broke above 1,350 on February 8 for the first time since July 2011. My market view is that a sustained break could see a move towards 1,400.

My market view is also that the buying in small-cap stocks suggests continued economy recovery in 2012. So far this year, the housing and manufacturing data are encouraging and point to renewal.

While investor sentiment continues to be bullish and market breadth positive, my market view is that the lack of mass market participation is worrisome and makes stocks vulnerable to downside risk in the event of bad news surfacing in the U.S. and globally.

What concerns me somewhat is the unresponsiveness of stocks despite the approval of the debt swap resolution in Greece by the eurozone and International Monetary Fund that will prevent a default for the troubled debt-laden country. In my market view, the pause suggests that stocks may have hit a near-term top and could be subject to some selling pressure if a new catalyst fails to emerge. The fourth-quarter earnings season has been average at best and the key earnings growth has been sluggish.

My market view is that there will be more issues in the eurozone, specifically with the other PIIGS (Portugal, Ireland, Italy, and Spain). Moody’s downgraded six of the eurozone countries and is warning that could be more to come, including heavyweight France. Following the debt resolution in Greece, Fitch downgraded the country to junk status and suggested a default was “highly likely in the near term.” Pundits feel that Greece could still eventually default and leave the eurozone. The country is in a financial mess and it will be difficult to pull out of its five-year recession.

As part of the tough austerity measures, Greece will have a legal mandate to aggressively cut debt over government spending, which will impact the ability of the country to emerge from its hole. The country needs to deliver on its austerity plan, including a massive debt of $330 billion euros for the bailouts. The problem is that the country’s tough austerity demands will make it very difficult for Greece to expand and grow its extremely fragile economy. It could take decades for the country to get out of its crisis mode. Just take a look at Japan, which has been caught in its mini recessions and stagnant growth for over 20 years.

 European stocks have been advancing higher, as shown by the iShares S&P Europe 350 Index, but with the eurozone perhaps entering another mild recession, I do not have an optimistic market view.

With stocks perhaps set to pause and lose momentum, you want to make sure you have risk management in place, which I discussed in Why Risk Management is Critical to Success.