The Dow is poised to break over 20,000 this week but will it hold?
The Dow has spent three weeks consolidating four weeks of gains. There has been no significant decline and every couple of days resistance is tested and it moves up by 10-15 points on every test. This is a perfect example of consolidation in place rather than a 3% to 5% drop over 5-7 days. They both accomplish the same thing and given the lack of damage this would always be the preferred method. Unfortunately, we never get to choose.
With nearly everyone expecting the other form of consolidation and a decent dip in early January, the lack of that dip has caused some anxiety for those who want to be long the market but did not get a buying opportunity. We are in that group. I wanted to see a decent dip to reduce premiums and erase the overbought excesses from the post election rally. Santa did not bring me the correction I wanted.
The Dow traded at 19,999.63 on Friday to miss that psychological 20K level by 0.37 of a point. If any Dow component had gained 6 cents while the Dow was at its peak, it would have been enough to ring the bell.
Previously there was some serious concern that a touch of 20K could produce a sell the news event. Because of the three weeks of consolidation and distribution at that level, I no longer believe that will happen. We need the Dow to push through 20K and then close well above that level in order to trigger the short covering and bring in the rest of the naysayers from the sidelines.
While there is always the possibility of a sudden decline, the dip buyers are alive and well. Analysts are now arguing the potential for a pre inauguration and/or post inauguration selloff. I worry about the potential for a terror attack when there are 2-3 million people congregating in one general location for parades and the swearing in ceremony. With five presidents in one place, only Bush the elder will be absent, this is a target rich environment. Add in the one million people on the mall and it would be hard for a hard-core terrorist to pass up the opportunity. That means I am worried about a pre ceremony selloff. After the event passes it should be the equivalent of an all clear signal for the markets.
We will be nearly two weeks into the Q4 earnings cycle and hopefully that will not cause any further market stress. We have had quite a few earnings warnings but the market seems to be ignoring them.
The S&P has not been as bullish as the Nasdaq but it did close at a new high on Friday thanks to the big cap tech stocks. The FANG + Apple rally was enormous and powered the Nasdaq Composite and the Nasdaq 100 to new highs. However, we all know that a rally powered by ten stocks cannot last. Other stocks have to join the party or the rocket will run out of fuel.
The small cap Russell 2000 is stuck in a rut and declined from resistance for the last two days. As the sentiment indicator for the broader market this is not a good sign. As long as it holds over 1,350 there is no damage but a break of that support could spread like a virus in a second grade classroom.
The economic calendar is light for next week with the Producer Price Index on Friday the most import report but it will not move the market. There are eight Fed speeches including Yellen on Thursday evening. The market is closed next Monday so volume will be light late in the week.
The futures are positive on Sunday evening at +2.75 but that could easily change by 10 points in either direction before morning. I expect another run at Dow 20,000 at the open assuming there are no overseas headlines to tank the futures overnight. Once that level is hit, the fuse will be lit. We could rocket sharply higher or it could turn into a dud. It is not the intraday levels that count. It is the close that counts and the direction into the close.
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