Contrary to market sentiment the prior week, the major indexes rebounded to multi-week highs.
Sometimes when everyone is leaning in one direction the market picks that moment to reverse direction. Investors are forced to cover positions and in this case they were forced to cover their shorts producing a multiday short squeeze.
Thursday and Friday continued the gains as traders reluctantly changed direction or cover before the long weekend where market gaps can and do frequently happen.
The S&P rallied to close at 2,099 and right at critical resistance at 2,100. If that resistance is broken by news headlines over the weekend then the next level to watch is 2,116. We were there back in April and that is where the 8-week decline began.
I looked at more than 1,000 charts this weekend as I searched for plays for the various newsletters. The vast majority of them were positive with less than 20 appearing to be candidates for new short positions. However, even though the majority of the charts were positive there were very few, probably 30 or less that presented decent entry points for long calls.
Most of the charts showed 3-4 day spikes out of a bearish trend and not something I would bet on for the long term. Quite a few could have been aggressive entry points for a short position if you are prone to selling into aggressive uptrends on the assumption those spikes will fail.
However, sometimes these trend reversal moves in the market take on a life of their own and like the Energizer bunny they just keep going and going and going. Since the portfolio is predominately long I would be thrilled if this is one of those occasions. While I am not counting on it there is the possibility it will continue. The S&P is only about 1.5% from a new high at 2,132. That is a powerful attractant for investors but it failed to work in November or April. Maybe the third time is the charm.
The Dow gained 372 points for the week but the last three days saw progressively lower highs. It was only a handful of points each day but they still count. The Dow failed to reach strong resistance at 17,925 and we can only attribute that to investors trying to jump in short before the actual resistance is reached. The high on Wednesday was 17,891, Thursday 17,888 and Friday 17,873.
The Dow made an 8-week low the prior week and the Nasdaq made a 6-week high this week. There has been a definite chance in direction for the Nasdaq index. It was supported by gains in the semiconductor index, thanks to blowout guidance by Applied Materials. It was supported by the biotech index thanks to the upcoming ASCO cancer conference next weekend. That lifted biotech stocks. Oil prices rising to $50 also lifted that sector. Lastly, the financial sector was up on expectations for a June rate hike.
The $64 question here is whether those sectors can continue to rise given their better than 4% gains last week.
The Nasdaq closed over resistance at 4,900 and is closing in on the 4,968 resistance high from April. Surpassing that level would be a five-month high and bullish for market sentiment.
The Russell 2000 closed at 1,150 and just below strong resistance at 1,155 and 1,165. A continued gain would be challenged by those level and the stronger resistance at 1,205. This was a major rally for the Russell and I doubt it can continue without some new set of positive headlines.
The S&P-400 Midcap index closed at an 11-month high at 1,492 with the old highs at 1,549. The midcap index has been the strongest index and it is very close to those old highs. This could be the market leader if we are going higher.
Crude prices are holding their gains and hovering just under $50 on Sunday evening. If the new Nigerian attacks and outages make the headlines next week we could see crude move over $50 and that would boost equities. Conversely, if analysts start talking about the oil sands restarting and the increase in production in OPEC we could lose that $50 level.
The OPEC production meeting is on Thursday so there will be plenty of headlines. The lack of a production agreement or a Saudi Arabian announcement of new production could kill the oil rally and push prices back to the low $40s.
The economic calendar is full of major reports with the ISM, Payrolls, the Fed Beige Book and another speech by Yellen. There is plenty of filler with numerous other reports that will be making headlines even if they do not move the market.
The earnings cycle is over with only a couple brand name companies reporting next week. Those are Broadcom (AVGO), Ctrip.com (CTRP) and Michael Kors (KORS).
I am still looking for a significant buying opportunity in the weeks ahead. While a surprise summer rally would be nice, it would definitely be a surprise.
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