The Dow posted a 456-point gain for the week but the other indexes lagged behind.
They say you should not look a gift horse in the mouth because long teeth means the horse is old and may not have long to live. The Dow rally was a gift to investors and we should just accept it and not question how much longer it will run. The index was almost evenly divided between advancers and decliners all week but every day there was 2-3 stocks that posted strong gains and helped lift the index higher. BA, GS, UNH and MMM were the big drivers on Friday.
That could continue next week with 12 Dow components reporting. There will be volatility with the direction depending on what they report. That is the only guarantee we have. The farther we get into the earnings cycle the more impact we will see from post earnings depression. After this week, there will only be a handful of Dow components left to report and they are strung out over several weeks. The lift from earnings will fade.
The Dow has moved into extremely overextended status and we should see a pause for profit taking in the near future. I believe it will just be a pause. The market fundamentals are strong and once investors take profits, there will be new investors looking to buy the dip. The Dow has risen so quickly that real support is nearly 1,000 points lower. I do NOT think we will test that 22,275 level. We will just have to wait and see where any decline stops in order to determine new support.
The S&P lagged the Dow with only a 22 point gain (+0.8%) for the week compared to the Dow's 2% gain. The S&P struggled over the last two weeks with minimal point gains or losses every day but with a solid upward bias. The sharp dip on Thursday at the open gave investors something to buy and the index surged for two consecutive days but the gain for the week was still anemic.
There are 183 S&P companies reporting earnings this week. There will be volatility in both directions. The long-term bias should remain positive but the index could dip back to support if the Dow stumbles on profit taking. That support is 2,555.
The Nasdaq is also lagging with only a 23 point gain (0.35%) for the week. The Nasdaq dipped sharply on Thursday to test support at 6,560 and that dip was eagerly bought. Unfortunately, when the index hit resistance on Friday at 6,635 that was met with a strong bout of selling. The big cap tech stocks have been choppy for the last three weeks and they cannot all remain positive long enough to provide a positive trend for the Nasdaq. On the chart below, note the very short/thin candles over the last week with the exception of Thursday. There is a real battle in progress between the buyers and sellers but not enough volume on either side to create a decent move other than that one dip buy.
The small cap Russell 2000 declined for two weeks after a spectacular run. For three days the index traded under support at 1,500 but Friday's positive market saw the index retest the prior resistance high at 1,512. The Russell only gained 6 points for the week and it was all on Friday.
The fact the index did not decline further is bullish. However, there is still that risk until the index breaks through that resistance and begins to make higher highs.
The pace of earnings increases significantly next week with 12 Dow components, 183 S&P components and hundreds of smaller companies. There is a significant chance of Dow volatility on Tuesday when CAT, MCD and MMM all report earnings before the open. Solid beats could send the Dow soaring and multiple disappointments could cause it to tank. Boeing on Wednesday is a big risk. That stock is very over extended and any disappointment could be painful.
The entire biotech sector will react to the BIIB, AMGN and GILD earnings. Amazon and Alphabet on Thursday after the close will impact the market for Friday.
There are a lot of important economic reports this week but none of them should be market movers. These are good reports for the economic fundamentals but the market will be more focused on earnings.
I believe there is some profit taking in our immediate future. I also believe that any dip should be bought. If I had my choice of type I would choose a moderate 3 day decline that allows new investors into the market rather than a 3 day consolidation where traders do not know which way to place their bets. Rip the band-aid off quickly and let the next rally begin.
I would definitely keep some cash in your account in case there is a headline dip that can be bought. North Korea is still simmering and always a potential headline.
Enter passively, exit aggressively!
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