The S&P appears to be poised for a breakout over 2,300 and that could trigger a new leg higher.
I hope that is not just wishful thinking but Friday's short squeeze lifted the S&P to 2,298 where almost any gain next week could push it to new highs. However, this is the fourth time the index has reached this level only to come to a dead stop. S&P 2,300 may be the new Dow 20,000 because it is now the level most watched by analysts and traders.
There have been numerous conflicting currents over the last couple of weeks with biotechs, financials, transports and chip stocks each performing in opposite directions on alternating days. It is hard to really establish a trend when there are so many opposing forces.
The big cap techs managed to close the Nasdaq at a new high on Friday but only by six points. That is still in the grasp of the prior new high resistance. However, the Nasdaq has been the leader and it is entirely possible it will lead the Dow and S&P to new highs.
The market has been at the mercy of politics and earnings. The flurry of headlines out of Washington can cause specific companies or entire sectors to plunge within seconds of the headline appearance. I do not recall in my lifetime this much political volatility in stock prices. I do not expect it to end soon. Every CEO meeting at the White House causes stocks to soar while every tweet causes somebody to decline. The T7 immigration ban last weekend caused several days of market declines because of the global protests. Those headlines could continue for weeks as the case makes its way through the courts.
Investors cannot wait on pins and needles in fear of the next headline. We have to trade what the market gives us and accept our lumps when necessary. That does not mean we should rush in to a truckload of new positions at a market high. We should be patient and maybe one of these headlines will give us a much better entry point.
The S&P is wedging up to a potential breakout with a pattern of higher lows dating back five weeks. Not shown on the top chart is the long-term uptrend resistance. That is currently in the 2315-2325 range. That suggests a break over 2,300 could quickly run into trouble.
The Dow gapped open to 20,071 and then spent the next five hours moving sideways to close at 20,071. There is significant resistance at that level as we saw the prior week when it spent three days there without any further gains.
Only two Dow components report earnings next week. The excitement level should begin to fade as earnings wind down. Only four Dow stocks added 125 points to the Dow gain on Friday. That is not likely to be repeated. We are in a positive environment for future stock gains but that does not mean we will be going higher every day.
The Nasdaq closed at a new high and just over uptrend resistance but still below the intraday highs from the prior week. There is nothing preventing the Nasdaq from continuing its gains. The biotech sector is healing, financials are improving on the outlook for reduced regulation and tech stocks are generally positive. All those factors should support a continued gain. The risk is post earnings depression and that normally happens over the next two weeks.
The Russell normally leads the market. However, the Russell has been the weakest index with the small caps slowly bleeding off their post election gains while the big cap indexes are celebrating the potential for a pro business environment. The Russell has not returned to the highs but it is not far away. If the small caps ever catch fire again, we could be in for a good run.
There is very little excitement in the earnings calendar for next week. Tesla is probably the most watched and Disney and Coke are important for the Dow.
The economic calendar is even less exciting than the earnings calendar. There is nothing on the schedule that should be market moving.
It is not that the market is overly bullish, it just will not go down. There have been numerous chances for the market to really sell off over the last month and we never saw an actual decline materialize. The Dow fell about 300 points from the prior Friday close to the low on Tuesday but it was all erased in Friday's short squeeze. That was a good chance to start a real decline but buyers rushed in whenever there was a decent intraday dip.
Investor sentiment is almost exactly split between bullish, bearish and neutral but somebody keeps buying the dips. They keep selling the highs as well and until one side loses their conviction we could be stuck in the recent range. If we were to breakout significantly, it could cause some major short covering and price chasing. I would say the risk is to the upside because we have proven there is no downside risk.
For the first Sunday in a long time, the futures are not down materially. They are only fractionally lower and the prior Sunday they were down -7.50 at this time.
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