Following President Trump's speech to Congress the stock market rallied strong. The Dow reached 21000 and notched another quick milestone as buyers gobble up the idea that Trump's policies will ignite the economy. Lack of specificity by Trump has not dissuaded buyers from continuing their bullish campaign.
Today's Market Stats
Before Trump's speech there were of course guesses about how the market would react. The common belief was that the market would not react well if Trump did not provide much in the way of details about his tax and spending policies. Well, we know what happens when the majority believes something and even though Trump's speech was long on promises and short on details, the market reacted with a strong rally today. But will it stick?
Trading volume was strong today so the rally was more than just short covering. There were practically no pullbacks during the day as each little pause brought in more buyers. The advance-decline line and advancing stocks minus declining stocks remained strong all day. New 52-week highs spiked up to a level not seen since January 25th and December 8th before that. The bulls have nothing to complain about with today's performance. Well, actually there are continuing signs of lack of momentum to the upside and with an overbought market that's always a concern.
March has come in like a lion and now we have to wonder if it will go out like a lamb (at least shorn of its wool, if not slaughtered for consumption). The good news for bulls is that statistically speaking, March has been the best month of the year in the past 10 years with an average gain of +2.7% (SPX gave us half that already today with its +1.4% gain) and positive 7 out of 10. April has been stronger in reliability -- up 9 out of the past 10 years.
But is this March going to be one that goes against statistics? January has a record of being the worst month of the year, down an average of -1.7% and positive only 4 out of the past 10 years. February is in the middle with a +0.39% average performance and up 6 out of the past 10 years. This January and February have hardly been weak and that paradoxically could set us up with a weak March.
But the data shows March can be even stronger when there's strength leading into it. Statistically speaking, a strong January-February still leads to a positive March but not quite as much. But March gets a strong boost if the market was positive November through February, which we've had.
The bulls clearly have a tail wind here and while I see the potential for a high this week, one that could lead to a larger pullback than we've seen since the end of January, it will be important to see what kind of pullback/consolidation we get. The pattern of the pullback will then provide clues about whether or not we should expect a continuation of the rally later this month.
If there's a strong tail wind behind the bulls why should we even consider the possibility that the bears might get their turn? In three words -- the Fed, debt and politics (not to mention more than a few technical indicators).
First, Yellen will be speaking on Friday and what she says could provide additional clues about what the FOMC will decide at their next meeting on March 14-15. Many are now thinking the Fed will be forced to raise rates again in March since inflation data requires them to start getting proactive. This could throw some cold water on the bulls.
Second, March 15th is also the technical deadline for the U.S. government to raise its debt ceiling. Congress is not playing well with each other right now and trying to reach an agreement could be a challenge. The market might not react well to all that, especially if the Fed has just raised rates and discussions of the amount of debt could prompt more hand wringing.
Third, European concerns could be reignited following the Dutch elections on March 15, especially if the Dutch show a continuation of an antiestablishment sentiment displayed by the Brits (Brexit) and Americans (Trump election). Following the Dutch vote will be the French vote and the worries about the EU unraveling could start to snowball.
All of the concerns mentioned above could certainly make March "different this time." That's of course all speculative but there are reasons to be cautious about the bullish expectations for March just because it has typically been so. In the meantime, the price pattern should provide early warning signs when things might change. I'll start tonight's chart review with a top-down look at the Dow.
Dow Industrials, INDU, Weekly chart
This morning's rally for the Dow popped it above the top of a parallel up-channel for its rally from February 2016, which is a bullish accomplishment if it can hold above the line, currently near 20960 (near this morning's open). A close below 20960 would be the first sign of trouble for the rally but until then the bulls have done nothing yet to indicate they're done buying.
Today's high was a small poke above a trend line along the highs from May 2011 - March 2015, currently near 21140, but obviously the rally could simply continue heading higher. On a weekly closing basis we'll have to see if the bulls can get the Dow above this potentially strong resistance in an overbought market.
Dow Industrials, INDU, Daily chart
The Dow's daily chart shows how this morning it gapped up to open at the top of its parallel up-channel for the rally from February. It then ran higher and poked above the trend line that runs along the highs from May 20111 - March 2015, near 21140, and as mentioned above, this line could end up being very strong resistance. Late in the day it pulled back below the trend line.
While it's possible today's flare-up will be followed by the start of a decline, the short-term pattern supports the need for just a small pullback correction, maybe Thursday morning, and then a final (?) small rally to complete the leg up from January 31st. So we could end up with a throw-over finish above the line but then a reversal back down into next week. The continued bearish divergence against the December high should be worrisome to bulls.
Key Levels for DOW:
- bullish above 21,155
- bearish below 20,734
Dow Industrials, INDU, 60-min chart
The Dow's 60-min chart shows an expectation for a small pullback correction into tomorrow and then one more leg up to complete he wave count for the rally from January 31st. The current projection is to about 21230. The first sign of trouble for the bulls would be a drop below Monday afternoon's high at 20851. Actually, we'd have a bearish heads up if the Dow drops back below 21K.
S&P 500, SPX, Daily chart
SPX continues to rally with increasing steepness in its uptrend lines, a sign that the rally is going parabolic. Or at least we know that steep trend lines tend not to last as long and when they break it's usually followed by a steep correction. Where this rally will end is anyone's guess but like the Dow, I think we're looking at just a small pullback and then one more minor new high to complete the rally.
I show a new key level to the upside at 2416, which is based on a projection off the short-term wave pattern (actually it's slightly lower, around 2413) and the Gann Square of Nine chart. I don't show the chart but it's interesting that 2416 is square to 666, the March 2009 low. Below that is 2406, which is aligned with the October 2002 low, October 2007 high, October 2011 low and October 2012 high.
Key Levels for SPX:
- bullish above 2300
- bearish below 2200
S&P 500, SPX, 60-min chart
The SPX pattern is very similar to the Dow's (the same with the tech indexes) and ideally we'll see a little more pullback/consolidation Thursday morning and then a final push higher. The top of a parallel up-channel for the rally will be near 2413 by Friday afternoon. From a Gann chart perspective we have 2406 and 2416 as potentially important numbers. From a pattern perspective it looks like we could make a high in between those two numbers. At least it's something to watch for since eventually even this rally is going to complete.
Nasdaq Composite, COMPQ, Daily chart
On February 15th the Nasdaq climbed above its trend line along the highs from April-August 2016, which was obviously bullish, and then used the line for support when it pulled back into last Friday's low and again on Tuesday. The back-test and bullish kiss goodbye led to today's rally and now I'm watching a trend line along the highs from November 22 - February 21, currently near 5925 (today's high was 5911).
There's also a price projection at 5940.60, which is where the 5th wave of the rally from November would equal the 1st wave. For now that gives us an upside target zone for the completion of the rally at about 5925-5941. The Nasdaq stays bullish as long as it doesn't drop below last Friday's low at 5800, a break of which would confirm the top is likely in place. This is true for the other indexes as well.
Key Levels for NDX:
- more bullish above 5941
- bearish below 5800
Russell-2000, RUT, Daily chart
The RUT finally reached its trend line along the highs from 2007-2014-2015, near 1414, with today's high at 1414.82. Slightly higher is a price projection near 1422 for the completion of a 5-wave move up from January 30th, which means it would be more bullish above 1422. At the moment we have a 1414-1422 target zone and the RUT has achieved the minimum expectation. While the short-term pattern, like the others, would look better with a small correction to today's rally and then a final push higher, the risk on the long side is now elevated with the RUT up against potentially strong resistance and showing significant bearish divergence since December.
Key Levels for RUT:
- bullish above 1422
- bearish below 1386
10-year Yield, TNX, Weekly chart
TNX has been chopping sideways since its high on December 15th and it formed a sideways triangle for the consolidation. This is a bullish consolidation pattern but it also points to just one more leg up to complete its rally from July 2016. Last Friday's low was a slight throw-under below the bottom of the triangle, typical for the completion of a triangle, and now this week's rally, especially today's, is a good signal that the next leg up for its rally has begun (although it hasn't yet broken out of its triangle pattern, the top of which is currently near 2.5%).
An upside target zone for TNX is 2.606-2.687, with the lower end being the projection for the 5th wave of the rally from July 2016 where it would equal the 1st wave. The upper projection is where the c-wave of an expanded flat correction off the January 2015 low would equal 162% of the a-wave. In between is a downtrend line from 1988-2007, currently near 2.64. TNX stays bullish (bond prices bearish) as long as it stays above last Friday's low (like stocks) at 2.314.
KBW Bank index, BKX, Weekly chart
The banks got a big boost today (BKX was up +3.6% at its high before finishing with a +3.2% gain) and like the other indexes it looks like BKX should pull back a little and then head a little higher before running into a potentially important high. BKX had stalled last week near a price projection just above 97 but then blasted through it today. The next upside target is 102.19, which is where the 5th wave of the rally from June 2016 would equal the 1st wave.
A shorter-term pattern for its rally suggests BKX could top out 100-101, which means we have a 100-102 target zone for BKX. After this week's high, which is when I think BKX could complete its rally, we'll have to determine from the next pullback/decline whether or not we should expect another leg up in May-June or if instead we'll get a more serious decline.
Transportation Index, TRAN, Daily chart
The TRAN has been working hard to rally since its January 3rd low but has only managed to make a small rising wedge with its minor new highs. This is an ending pattern, typically seen at market tops. A drop back below its November 2014 high at 9310 would be a bearish heads up and below its February 2nd low at 9047 would tell us a top is in place.
SPX vs. Relative Strength of TRAN/UTY, XLY/XLP, RUT and BKX, Daily charts
The 3 charts below show SPX at the top, clearly making new highs since December. But what's disconcerting, as can be seen in the middle chart, is the lack of participation in some key sectors. The two bottom charts show Relative Strength (RS) and the middle chart shows the transports have been underperforming the defensive utility sector since the December high. And if the consumer was doing well we'd see XLY (consumer discretionary) outperforming XLP (consumer staples) but since the December high we've seen just the opposite.
The bottom chart shows the significant underperformance of the RUT vs. SPX, which is not supporting the "animal spirits" that we typically see in a bull market. The positive thing for the market is the fact that the banks are showing at least equal strength at this point, although again, it's best if the banks are out in front. I don't show the RS for the semiconductors but since February 8th the SOX has been underperforming SPX. I like to see BKX and SOX in synch and leading the market in order to feel better about the direction. Right now we have mixed and weak signals that do not support this rally.
U.S. Dollar contract, DX, Daily chart
The US$ spiked up last night but then pulled back sharply this morning. The early-morning high was another test of the top of a previously broken up-channel for the rally from May 2016, which was last tested on February 15th. I see the potential for the dollar to make it up to 103 for a larger bounce pattern off the February 2nd low but at the moment I think there's a good chance the dollar will drop from here instead of rally.
Gold continuous contract, GC, Daily chart
Gold consolidated today after this morning's low tested support at its 20-dma, near 1237. That and the uptrend line from December, currently near 1235, should act as support if there are higher prices to come for the current bounce. But following Monday's high, which back-tested its broken 200-dma, currently near 1264, it's looking like we could see gold head back down from here. A drop below 1235 would tell us the high is likely in place. But for the short term there is upside potential to a price projection at 1273.20 (for two equal legs up from December), which would also result in a test of a downtrend line from August 2016.
Oil continuous contract, CL, Daily chart
Oil's high on February 23rd was essentially a test of its January 3rd high and is showing a significant bearish divergence. It could be consolidating sideways as MACD "resets" near zero and a break above 55 would likely lead to a rally to the 58-59 area. But the choppy move up from January 10th looks like an ending pattern and I think the higher-odds scenario points to a breakdown. A drop below the February 8th low at 51.22 is needed to confirm a high is in place.
Today was a busy day for economic reports but they were all ignored. There were no real surprises and the market had already been on a tear to the upside. The rest of the week will be fairly quiet.
The VIX issued a warning signal today by not agreeing completely with the stock market's rally. It gapped down this morning but then by this afternoon it rose sharply and retraced most of this morning's decline. Someone does not believe the rally will last and when we've seen this before it has often been a good warning sign for bulls not to get complacent. Stops should be pulled up tight, such as no lower than last Friday's or yesterday's lows.
Price is king and the new highs must be respected, especially by bears who stare in disbelief that the rally continues as it has. We have lots of warning signs and technical indicators that tell us not to trust this rally, especially since it's been built on hope and not much in the way of concrete accomplishments by the Trump administration (when it comes to tax and spend policies). This makes the rally especially dangerous and reason enough to pay close attention to those little signals that warn us things are not as rosy as they appear when looking at just price.
The wave pattern for the rally looks nearly complete and ideally needs just a small pullback/consolidation into Thursday morning and then one more push higher. If we get the push higher I'd then pull stops up real tight on long positions and if you're itching to get short, look for a rollover from a new high and use the high for your stop. It might take a stab or two to make it work (never try more than 3 times since that's the market telling you you're too early). If we get a new high, use a break of the pullback low from today's high as a stop level for getting into a short position (with a stop on the play at the high).
Bears should be close to having a turn at the feeding trough but at the moment it's too early and it's important to let price tell you when to try, and not by trying to anticipate when and where that high will occur. I have my guesses, noted on the charts in my commentary, but don't we all (wink).
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT