The market is ignoring all the negative headlines and overbought technicals.

The Nasdaq 100 Index is the most oversold since January 3rd, 2000 but nobody seems to care. There are Russian spy ships off the coast. North Korea assassinated the leader's half brother and launches new ballistic missiles weekly. Venezuela is circling the drain and Iran is chanting death to America. The national security chief had to resign and the debt ceiling fight is rapidly approaching. None of these thing have had any impact on the market.

The bulls are running and the bears are being trampled. The trend is your friend until it ends and there is no end in sight.

All of that should be very concerning to a rational thinking investor. Apparently the market is benefitting from a survival of the fittest mentality among fund managers and they are chasing stocks in hopes of beating their competition.

The Nasdaq 100 ($NDX) Relative Strength Index (RSI) reading rose again to 83.09 when 70 is considered overbought. Friday was the highest reading since January 3rd, 2000 when it hit 84.15 after 2.5 months of nearly consecutive gains. Overbought oscillators can always become even more overbought but this is flashing a huge warning sign there could be a peak ahead. In 2000, the index declined more than 500 points over the next three days but once the overbought conditions were equalized, the index went on to gain 1,400 points over the next two months before the bottom fell out in March. We need a few days of equalization so the rally can continue.

January 2000

Today

The S&P has surged 50 points over the prior resistance at 2,300 and is now fighting resistance at 2,350. The S&P is also overbought but not nearly as badly as the Nasdaq. The tech indexes have been leading the market and over the last two weeks Apple was a big influence on the Dow and the Nasdaq.

Indexes can rebound strongly from oversold declines like we saw in November. They rarely post monster breakout rallied from new highs. Typically, gain from new highs are 2-3 days up, 1-2 days down, repeat as the profits are consolidated on the way up. When indexes streak higher, the end result is normally a major retracement.

I have been saying we need a 3% to 5% decline to equalize pressures. At this point, I would be thrilled with a 2% to 3% decline. That would take us back to 2,300 or slightly below and that would be a good starting point for a longer-term rally.

Don't get me wrong. I am thrilled the market has finally gone directional. However, I and probably tens of thousands of other investors are waiting patiently for a dip to buy. I am sure quite a few investors were cautious when the breakout appeared and we were left behind without being fully invested. I believe we are going to finish the year a lot higher but it will not be an unbroken sprint higher.


Dow 21,000 is the new target and more than half the Dow components are at or near their recent highs. The Dow spike is also unsupported and needs to retrace some gains in order to move materially higher.


The small caps remain the weakest part of the market. Post election some small cap stocks rose 30%, 40% even 50% and they are slowly working through the consolidation process. Until the small caps break out to new highs like the rest of the market there will always be an * footnote beside an commentary on market gains.


The earnings cycle is winding down with the last two Dow components reporting along with 50 S&P stocks. By the end of the week more than 92% of the S&P will have reported earnings. Tesla is the highest profile stock to report this week and options are suggesting investors expect a 5% move in either direction.


The economic calendar is light with the FOMC minutes the speed bump in the middle of the week. With the market closed on Monday the volume will be light on Tuesday. Friday was option expiration and Tuesday will be settlement day and those days are rarely big market movers.


I have seen some crazy option premiums this week. With many stocks at new highs the LEAPS premiums are incredibly inflated with bid/ask spreads of $2 to $3 in some cases. Traders do not know where the market is going and market makers are not going to take any chances with premiums if they can avoid it. For me, a $5-$7 OTM option on a $125 stock should not be $14 bid and $17 ask. That is just crazy.

I have been trying to find some lower intensity opportunities while we wait for a consolidation period to reduce those premiums and give us a buying opportunity.

I would love to add some positions in the defense industry but those stocks/premiums are simply unreasonable. The big cap tech stocks are also out of sight. We just need to be patient. There is always another day to trade as long as you have money left to invest.

Jim Brown

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