InvestmentHouse - Market Rally Shows Volatility But Keeps Marching Higher (WeekendNewsletter)
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- On again, off again market. Kind of.
- Market rally shows more volatility on the week but keeps marching higher
across the board.
- Small caps, midcaps lead Friday. Showing flashes of brilliance. Flashes.
- Market continues producing leaders from all areas.
- The issues: extended near term, earnings ahead after a strong run higher,
some volatility entering, sentiment extremes.
- Bullish sentiment having its own sort of blow off top, breaking out from
high to a new cycle high.
- Have to play the market at hand, but very mindful of the indications,
technical and sentiment, lining up.
Friday the stock market was back 'on' in a week that saw stocks up one day,
down the next, then back up. Tuesday gapped higher just to reverse.
Wednesday rallied as if Tuesday never happened. Thursday was modestly off,
then Friday was back up.
More than just back and forth, however, the mix of the moves changed day to
day as well. The prior Friday was up for all indices, but it was up big for
RUTX and SP400. Then the large cap indices took over. Friday it was back
to the small and midcaps leading as they put in 1+% moves to the 'ehh' moves
of the other indices.
SP500 12.27, 0.44%
NASDAQ 40.33, 0.55%
DJ30 53.91, 0.21%
SP400 1.07%
RUTX 1.33%
SOX 0.11%
NASDAQ 100 0.34%
VOLUME: NYSE +16%, NASDAQ -1.5%.
ADVANCE/DECLINE: NYSE 2.6:1, NASDAQ 2.5:1. Hey, somewhat good breadth,
thanks to the small and midcaps.
What are the takeaways from this?
First, the volatility that showed up Tuesday is still there though the late
week moves tend to mitigate that Tuesday upside gap and sharp reversal.
Second, the uptrends remain despite the volatility. Not a guarantee the
upside continues, but the trend keeps finding buyers on the selling
attempts.
Third, leadership continues showing up, and it shows up from different
areas. Large caps have dominated as evidenced by the DJ30, SP500, NASDAQ
moves. For January, the time of the 'January Effect,' the large caps show a
lot of upside. The small and midcaps have continued trending higher,
however, and the past two Fridays they took the market lead with outsized
moves.
The bottom line?
For now the market continues generating new leadership and somewhat day to
day or every other day it is rotating to different areas. All the while,
the market continues to trend higher, and that indicates money is mostly
remaining in the market. Violent reversal sessions such as last Tuesday
indicate that some money is being taken to the sidelines, selling as the
later money pushes into the market, but thus far just one of those sessions
has showed itself.
The market continues finding leaders and new stocks to move higher. At the
same time the large cap indices, particularly DJ30 and SP500 are extended in
their current runs both in terms of the number of rallies after last leaving
the 50 day MA in September, as well as the percentage above the 200 day SMA
(DJ30 16.7% at the high; SP500 12%). Those technical characteristics
typically lead to a correction below the 10 and 20 day EMA, more like the 50
day MA.
Thus far, however, this melt upside has not allowed a correction. It will
come, and the volatile reversal from Tuesday, the one day up, one day down
action the rest of the week are a caution flag that the sellers are testing
the waters right now. It does not mean they will succeed right now, but
they are trying.
With that scenario, while you can sell out and wait for a correction, we are
going to continue playing the upside with good new plays while letting
current positions run if they are, taking gain along the way. Then when the
inevitable correction starts, you already have gain in the bank and can take
positions off the table with in many cases even more gain, and you can close
the newer positions that struggle with near support.
As we have all seen in the past, it can look as if the market is starting
what would be an expected correction, only to right itself and continue
higher. As discussed last weekend, the indicia of a blow off top are not
present, though I do note that volatility jumped last week starting with the
Tuesday reversal, and continued higher into Thursday before a Friday fade.
Keep an eye on volatility as rising volatility in an uptrending market is a
sign of a more important top. VIX is still well contained inside its range
for now, however, so that is not flashing any warnings in this regard.
Extra-market events to cause trouble?
What about other events? Everyone likes to play the 'what drives the
market' game, and this weekend it is the government shutdown. There is so
much gnashing of the teeth over a shutdown, driven by those who want you to
believe you have to have the government tending to your every need every
minute of the day. Truth is, the essentials people rely on, even though
they are not really constitutionally areas the government was ever supposed
to enter, will be met.
That said, the top story on CNBC.com today is about Nicolas Cage spending
$150M on mansions, and island, etc. I guess things are not THAT bad as a
result of a shutdown. Surprise.
The democrats are going all in on their amnesty card while the republicans
once again struggle to even articulate a message. Ironically, the GOP
Congress complains about Trump tweeting his thoughts as they ping pong
around in his head but cannot put together a meaningful one line statement
about their position. The classic example is in the healthcare hashtags of
the democrats versus the republicans over the tax cuts. The democrats were
simple and direct, i.e. effective: #taxcutsfortherich. Did the republicans
initiate #TaxCutstoGiveYou$4500, or #TaxCutsIncreaseYourPaycheck? No, their
great minds incubated #keepYoMoney and #TaxCutsandJobsAct. Brilliant
marketing!
But, I digress. A lot is being made about the shutdown but it has little
actual effect. Oh yes, some are arguing that it will impact GDP. Why?
Because they believe the government is the main driver in our economy. They
are wrong; if that was correct, then the 10 years we did not have a year
averaging 3% GDP growth would not have occurred. Government spending
exploded in those years yet the economy staggered and stumbled around.
Clearly, government spending does NOT have a major impact on growth, and
indeed I would posit that a shutdown might help spur more growth as long as
the regulations are being reduced, and we know they are.
Earnings anyone?
Ah, the REAL near term impact. After a great response to the Q3 earnings
starting late October, the market rally continued to present day. Now the
Q4 season has started and the initial reaction to the stocks announcing is
not great (e.g. AXP, IBM) though there are company specific issues at play.
Still, after such strong runs that were kicked off by earnings, it takes a
really strong quarter and outlook to propel further gains. To us, earnings
could very well be the trigger that gives traders and investors the 'well,
why not take some profits?' mindset and thus a correction of this impressive
run.
Therefore, while we still see a lot of stocks we like, we also know that
earnings are here and many positions sport excellent runs from the last
round of results. Therefore, with options particularly, it is wise to bank
at least some more gain ahead of results if not all of it. Now there are
ALWAYS special circumstances where you don't mind holding a position through
earnings -- some plays are turning the corner after a long decline and
earnings tend to help that move. After big runs ahead of results, however,
the probabilities are a near term decline even if they do bump higher on the
results. Many times they open higher then reverse as the good news is now
all in and there is simply no more money to be pulled in.
Accordingly, a bit of common sense is warranted, i.e. not trying to squeeze
every nickel out of a play. The reward potential suffers high diminishing
returns in that situation. In other words, do you want to risk making
another buck while risking 5 bucks? The probabilities start turning against
you, and success in the market is all about getting the probabilities in
your favor from the pattern, to the stage in the lifecycle of a move, to the
percentage of money allocated to a particular trade. Right now there are
still a lot of good patterns, but for many stocks that have rallied well,
they are a bit aged in terms of the lifecycle. Also, there is the market's
lifecycle on top of that. We can play stocks in good positions that are not
extended, but on those that have enjoyed great runs, entering ahead of
earnings (with the intent of riding them through results) is not the best
plan in most cases.
Bulls on a rampage, bears in deep hibernation.
Bullish sentiment broke out to 66.7 last week, screaming to a new cycle high
and indeed the highest reading in the past 30+ years. At the same time
bears fell to 12.7, the lowest since 1987. They held in the range for
almost a year but now are breaking out. These are extreme bookends to the
market, showing sentiment is extreme.
Extremes are the only things important in sentiment. They are now at
extremes for certain, and are thus another indicator that a market pullback,
correction, etc. is going to come.
This week.
So, yes we have some new plays that look great and have time before
earnings. A couple we don't have a problem with holding through earnings if
they start to make the move we want ahead of time. And still other current,
longer term positions, we will look to bank some more gain ahead of results
if they have put in good moves.
THE MARKET
CHARTS
RUTX: It was the day for the small and midcaps as the bids flipped back
their way. RUTX surged to a new closing high though still below the
intraday high from Tuesday. Volatile as the other indices, but not nearly
the extended position. The upside is coming in big chunks when it comes,
holding out promise for a belated and more sustained January Effect.
SP400: A nice, market-leading move here as well as the midcaps jumped off
the 10 day EMA to a new all-time high. A bit volatile as well of course,
but holding tight on the trend up the 10 day EMA. As with the small caps,
this is more their time, and thus the rally should have more staying power.
Near term they are just a bit extended on this last leg given the 4 to 5
week run. As far as the 50 day MA, however, they last toughed it in
November, so not overly extended.
SOX: So important to the market, and an important move this past week,
breaking to a new all-time high past the 2000 peak. No one said a thing
about it but us. Eye not on the ball I think. Anyway, a nice new breakout
from the 8 week base, slowing a bit at the end of week. Many chips are
looking much improved in good patterns after the 2 month hiatus and that is
still good news for the market overall though they may be extended just a
bit near term after a rally into the breakout move.
NASDAQ: This current rally leg is almost 3 weeks old and pretty much
straight up outside of the Tuesday volatility. Friday saw NASDAQ to another
new high, so after that kind of move near term NASDAQ is extended. What
does that mean? Well, it can still move higher, it is just that after this
kind of rally it likely has less upside left in it before a test comes. We
do have some new plays on AMZN and NFLX after they put in short
consolidations, but even they remain overall extended despite the recent
test; we are looking at them more for a short play around earnings.
DJ30: Trended higher last week but did show volatility Tuesday and
Thursday, and then struggled some Friday thanks to AXP, IBM. Would have
performed better but for those, or as they say here in the office, it would
have performed better if it did. Anyway, really extended off the 50 day MA
and over the 200 day MA but thus far not testing.
SP500: Similar to DJ30, but SP500 punched out a new high Friday. Some
volatility, quite extended in terms of the 50 day and 200 day MA, but thus
far still finding bids. Not a blow off top as noted last week, but as with
DJ30, up 3 weeks on this leg alone AFTER it was already extended.
LEADERSHIP
The market continues producing new stocks moving higher.
Clearly manufacturing (HON, EMR, UTX), machinery (CAT, CMI), transports
(AAL, JBHT, BA) continue strong runs, not really in buy points given the
length of the moves.
Then there are others that broke out later that are not that extended in the
bigger picture, e.g. FAANG stocks. Software such as CRM, VMW, FFIV.
There are newer areas in oil (MRO, CVX, PTEN), Drugs/Biotechs (AMGN, IMGN,
SRPT), financial (C, BAC).
There are sectors and stocks that rallied but then needed to test and have
done so. Semiconductors are the classic example as many break higher (MCHP,
XLNX, LRCX) though many are right at earnings making it harder to play.
AVGO certainly looks interesting. Not all are great, e.g. SWKS, breaking
lower from the 200 day SMA.
Chinese stocks are another example similar to chips. BIDU looks great to
continue higher. YY is a bit extended on this move but solid. BITA looks
very good. HTHT looks great.
Retail is a broad mix that covers many stages. BBBY and CAKE are examples
that look ready to break higher. WMT is renewing its upside. DDS, JWN and
other department stores are rallying. Makes sense given the economy.
Individual stocks include SQ, TSLA, DIS. GRPN put in a strong move Friday
after a drop and four week lateral consolidation.
MARKET STATS
DJ30
Stats: +53.91 points (+0.21%) to close at 26071.72
Nasdaq
Stats: +40.33 points (+0.55%) to close at 7336.38
Volume: 2B (-1.48%)
Up Volume: 1.32B (+300M)
Down Volume: 627.91M (-347.37M)
A/D and Hi/Lo: Advancers led 2.5 to 1
Previous Session: Decliners led 1.74 to 1
New Highs: 294 (+126)
New Lows: 41 (-3)
S&P
Stats: +12.27 points (+0.44%) to close at 2810.30
NYSE Volume: 1B (+15.87%)
A/D and Hi/Lo: Advancers led 1.98 to 1
Previous Session: Decliners led 2.61 to 1
New Highs: 244 (+63)
New Lows: 86 (-8)
SENTIMENT INDICATORS
VIX: 11.27; -0.95
VXN: 16.15; -0.80
VXO: 10.41; -0.63
Put/Call Ratio (CBOE): 0.86; +0.03
Bulls and Bears: Cycle highs and cycle lows for bulls and bears,
respectively. This is starting to flash brightly as a warning. Bulls are
having their own blow off top of sorts.
Bulls: 66.7 versus 64.4
Bears: 12.7 versus 13.5
Theory: When everyone is bullish and has put all their capital to work,
where does the ammunition to drive the market come from? There is always
new money to start a new year. After that is used will more money be
coming? That is the question.
Bulls: 66.7 versus 64.4
64.4 versus 61.9 versus 64.1 versus 64.2 versus 62.3 versus 61.5 versus 63.5
versus 64.4 versus 63.5 versus 62.3 versus 60.6 versus 60.4 versus 57.5
versus 54.3 versus 50.5 versus 47.1 versus 49.5 versus 49.5 versus 48.1
versus 50.5 versus 57.5 versus 60.0 versus 60.2 versus 57.8 versus 50.0
versus 52.5 versus 54.9 versus 51.5 versus 50.00 versus 55.8 versus 50.00
versus 51.9 versus 58.1 versus 58.7 versus 58.5 versus 54.7 versus 51.9
versus 56.3 versus 55.8 versus 49.5 versus 56.7 versus 53.4 versus 57.7
versus 63.1 versus 61.2 versus 61.8 versus 62.7 versus 61.8 versus 58.2
versus 60.6 versus 58.6 versus 60.2 versus 59.8 versus 59.8 versus 59.6
versus 58.8 versus 56.3 versus 55.6 versus 51.0 versus 42.9 versus 41.7
versus 47.1 versus 42.9
Bears: 12.7 versus 13.5
13.5 versus 15.2 versus 15.1 versus 15.2 versus 15.1 versus 15.1 versus 15.4
versus 15.4 versus 14.4 versus 14.4 versus 15.1 versus 15.2 versus 15.1
versus 17.0 versus 17.1 versus 19.0 versus 20.2 versus 19.1 versus 19.1
versus 18.3 versus 18.1 versus 17.0 versus 16.2 versus 16.5 versus 16.7
versus 18.6 versus 18.8 versus 18.6 versus 18.3 versus 19.2 versus 18.3
versus 17.1 versus 17.3 versus 17.9 versus 17.9 versus 18.3 versus 17.5
versus 18.3 versus 18.1 versus 17.3 versus 13.75 versus 17.3 versus 16.5
versus 17.5 versus 17.6 versus 16.7 versus 17.6 versus 17.5 versus 17.3
versus 18.3 versus 18.4 versus 19.6 versus 19.6 versus 19.2 versus 19.6
versus 22.3 versus 21.6 versus 23.5 versus 25.7 versus 24.3 versus 23.1
versus 23.8 versus 23.1 versus 22.8 versus 23.1 versus 24.3
OTHER MARKETS
Bonds: 2.661% versus 2.618%. So much for 6.2% as bonds tanked, sending
yields surging.
Historical: the last sub-2% rate was in November 2016 (1.867%). 2.618%
versus 2.587% versus 2.535% versus 2.55% versus 2.559% versus 2.551% versus
2.482% versus 2.456% versus 2.463% versus 2.464% versus 2.405% versus 2.434%
versus 2.412% versus 2.474% versus 2.485% versus 2.484% versus 2.501% versus
2.459% versus 2.398% versus 2.351%
EUR/USD: 1.22169 versus 1.2241. Holding the break higher last week,
working laterally.
Historical: 1.2241 versus 1.2198 versus 1.22698 versus 1.22060 versus
1.20608 versus 1.19507 versus 1.19322 versus 1.19662 versus 1.20313 versus
1.20756 versus 1.20177 versus 1.20573 versus 1.2001 versus 1.1936 versus
1.1936 versus 1.18998 versus 1.18593 versus 1.18628 versus 1.18658 versus
1.18792 versus 1.18408 versus 1.17703 versus 1.1752 versus 1.17798 versus
1.18392 versus 1.17430 versus 1.17652 versus 1.1764 versus 1.17754 versus
1.17990 versus 1.18276 versus 1.18727 versus 1.18983 versus 1.18976 versus
1.18529 versus 1.18489 versus 1.1899 versus 1.19329 versus 1.18148 versus
1.17402 versus 1.1791 versus 1.1787 versus 1.1786 versus 1.1799 versus
1.16443 versus 1.16646 versus 1.16439 versus 1.15871
USD/JPY: 110.834 versus 111.036.
Historical: 111.036 versus 111.290 versus 110.357 versus 111.024 versus
111.204 versus 111.534 versus 112.706 versus 113.15 versus 113.58 versus
112.749 versus 112.677 versus 112.27 versus 112.690 versus 112.758 versus
113.216 versus 113.208 versus 113.304 versus 113.363 versus 113.334 versus
112.870 versus 112.625 versus 112.619 versus 112.298 versus 112.639 versus
113.555 versus 113.476 versus 113.48 versus 113.473 versus 112.473 versus
112.554 versus 112.442 versus 112.190 versus 112.55 versus 112.102 versus
111.583 versus 111.244
Oil: 63.31, -0.58. Still in a weeklong test of the 10 day EMA,
consolidating that good rally.
Gold: 1333.10, +5.90. Tested the 10 day EMA, bouncing modestly Friday. It
too is testing a move and is measuring the prior high at early September.
Why is gold moving up? Inflation?
SUPPORT AND RESISTANCE
NASDAQ: Closed at 7336.38
Resistance:
Support:
7,000 from mid-December
The 50 day EMA at 6962
6914 is the late November all-time high
6796 is the early November 2017
The 2016 trendline at 6694
6641 is the October high
6477 is the September intraday high
6461 is the July 2017 prior all-time high
The 200 day SMA at 6455
6450 is the early September high
6341.70 is the all-time high from early June.
6300 is the mid-June interim high
6205 is the late May all-time high
5996 is the recent May 2017 low
5937 is the all-time high from April
5915 is the tops of the March to April 2017 range
5910 is the lower gap point from mid-April
5800 from the February consolidation lows
S&P 500: Closed at 2810.30
Resistance:
Support:
2751 from early January 2018
The 20 day EMA at 2741
2694 is the mid-December peak
The 50 day EMA at 2680
2597 is the November 2017 high
2569 is the upper channel line from the March 2009 uptrend channel
The 200 day SMA at 2508
2491 is the August all-time high
2480 the late August and early August highs
2453.46 is the June prior all-time closing high
2409 is the July 2017 closing low
2406 is the all-time high from May 2017
2401 is the March 2017 all-time high
2352 is the May 2017 low
Dow: Closed at 26,071.72
Resistance:
Support:
25,697 is the 10 day EMA
The 20 day EMA at 25,340
24,835 is the mid-December consolidation range
The 50 day EMA at 24,609
24,312
23,602 is the early November 2017 high
23,608 is the early November high
22,420 is the September high
The 200 day SMA at 22,422
22,179 is the August 2017 all-time high
22,086 is the mid-August lower high
21,681is the July prior all-time high
21,638 is the July 2017 closing high
21,529 is the June 2017 high
End part 1 of 3 |
