The market continues to rally although there were a couple hiccups last week.
The Dow has closed at a record high for 11 consecutive days. That is the longest streak since 1992. If the index can do that for two more days, it will be the longest streak ever. That kind of record coupled with the overbought conditions in the Nasdaq should worry even the most bullish trader that the market has crawled very far out on a limb and there may be cracks forming.
I know I have mentioned the overbought for the last two weeks and the market is still rising. I have also commented that overbought could always become more overbought and that has happened. What we do know that just like nighttime follows sundown, there will eventually be a decent bout of profit taking to refresh the market for its next run higher.
My problem for this week is the potential sell the news event that could be around the president's speech to the joint session of congress and live TV audience on Tuesday evening. The speech will need the perfect balance of tone, content and delivery in order to keep the optimism flowing in the market. Unfortunately, President Trump is not a public speaker. Couple that with the content and investors could decide on Wednesday that real change may be farther off than previously expected.
Goldman Sachs warned that the market had reached "maximum optimism" and there was nothing left to power it higher. Obviously, that is one call by one analyst but there have been negative rumblings for a couple weeks.
They say the trend is your friend until it ends. As LEAPS investors, we are expecting a dip in the trend but a reversion back to the trend in the months ahead. There are plenty of positive policy changes in the works that should continue to drive the market and lift it out of any profit-taking decline. Taxes, deregulation, healthcare, etc, are all going to be positive for the economy.
The S&P is not as overbought as the Dow is but it is still at risk of a minor decline. The short dip to 2,350 last week was bought on Friday and the index closed at a new historic high. If the index suffered a garden variety retracement of only 3% that would only drop it back to what should be strong support at 2,300. That should be our market risk unless something changed dramatically in the economic outlook.
The Dow is overbought but we are seeing almost daily rotation by the components into a different leadership group every day. This is excellent that it is not just financials leading the index higher but nearly all the components are participating to some extent. Nearly 20 components are at or near new highs. A 3% correction on the Dow would knock it back to 20,200 with strong support waiting at 20,000-20,100. While that is not a big decline relatively speaking, it would be painful.
The Dow is targeting 21,000 and could hit that level this week if the speech is a success. We are not likely to have any super bullish days on Mon/Tue as traders become cautious about the potential for a sell the news event.
The late week decline in the Nasdaq may have temporarily softened some of the overbought pressures but the indexes remain near the most overbought since January 2000. The decline in the NDX knocked 5 points off the RSI but it is still just under 80. The Nasdaq big caps are all at new highs and the bullishness is not quite at the extremes we saw back then but are still excessive.
The Nasdaq 100 is up 15% since the election and that is extreme for a four-month period.
The small caps remain the weakest link and the intraday low on the Russell on Friday was a two-week low. The Russell rallied 21% after the election and it has not yet consolidated those gains despite trading sideways for the last 2.5 months. If the small caps were to catch fire, we could have an entirely new market rally but I believe we still need to see some significant selling, possibly back to 1,340 to rekindle the animal spirits in the small cap stocks.
The earnings cycle is winding down but there are still quite a few big names reporting this week. Priceline, Salesforce.com, Broadcom, Best Buy, Costco, Sears and Staples will provide the most earnings headlines.
The economic calendar is of course headlined by the president's speech on Tuesday. Following that in importance is the Richmond Manufacturing and ISM Manufacturing reports. Everything else is filler.
In just over two weeks the debt ceiling deadline will become the big news as the republicans and democrats fight out whether to raise the spending limit this early in the new administration and by how much. We know the president is going to push through some large spending requests so only a token hike this time just sets up for a more contentious event later. There is no easy way out of this problem for the president. He is going to catch flack from the press regardless of what happens.
The dip buyers are alive and well and until they pull their bids, the market is going to continue moving higher. It may be in fits and starts rather than just straight up because traction becomes more difficult the higher we go without a pause.
I would try not to be overly long heading into the speech. If you are long, be sure and keep some stops in place. However, be aware that any post speech decline could be similar to the post election decline where there is a giant dip that is immediately bought. If there are stocks you would like to by cheaper than they are today, you might put in a few limit orders well under the current price. You never know, you might get lucky.
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