After a long period of stagnation a breakout to new highs tends to create a string of new highs once investors believe it is not a double top formation.
Typically hitting a new high triggers some selling as investors take profits when their target was hit. That did not happen this time. The only weakness we saw was on Friday and that can hardly be called weakness. The S&P was down -2, Nasdaq -4 but the Dow was +10 and the Russell +3. That is called treading water. Nobody really wanted to sell and every dip met willing buyers but not enough to really push the indexes higher ahead of the weekend event risk. If nothing else happens before Monday, I would expect the market to try and move higher as long as Asia and Europe are not melting down.
The Russell 3000, the top 3000 stocks by market cap in the market, closed at a new high on Friday. The old high close was 1,273 back in June 2015 and it closed at 1,275 on Friday. That is a strongly signal and it would be very bullish if the R3K continued to move higher from here. That would send shockwaves through the other indexes.
The Vangard Total Market Index (VTI) traded at a new intraday high on Friday at 110.97 but failed to close over the prior high at 110.72. This is an index representing 3,814 stocks of all sizes and market capitalization. This is "the market" for all practical purposes. Like the R3K if the VTI can continue to move higher it would be very bullish.
On the negative side of the ledger the NYSE Composite, an index of more than 1,900 stocks, remains well below its prior highs. Only about 1,500 of these stocks are U.S. companies and the index is heavily weighted to the energy sector. There are listed stocks from more than 38 countries so a market decline in China or Brazil or elsewhere would be a drag on the index.
The historic closing high is 11,239.66 and the index closed at 10,773 on Friday. That was a major breakout from the solid resistance at 10,640 so the trend is positive but it needs to gain nearly 500 points to make a new high. I suspect it will remain a laggard while the R3K and VTI continue their moves higher.
The Dow Transports ($TRAN) halted their rally at resistance at 8,000. The falling oil prices are good for airlines but bad for railroads. The Transports need to continue rising over the resistance at 8,260 to confirm the Dow breakout. I have no hope for a Transport breakout to a new high in the near future. We just need it to move over that Q4 resistance level to contribute to the broader market rally.
The weeklong rally did wonders for the internals. The percentage of S&P stocks over their short term 50-day average spiked to 86.6% from the 72% the prior week. This indicator is approaching the highs from March and November 2014. Unfortunately, this is also an indicator of an overbought market.
The percentage of S&P stocks over their 200-day average rose to 77% and just slightly below the 77.6% higher in April and the 78.0% high in February 2015. This is also an indicator of an overbought market.
The percentage of S&P stocks with a buy signal on a Point & Figure chart rose to 71.8% but remains under the April high at 79.4%. The 2014 high was 84.6% in July and the 2013 high was 84.4% in both July and November. This suggests the market has room to run but we are approaching nosebleed levels.
The correlation between the High Yield ETF (HYG) and the S&P is still intact and the HYG has broken out to a new high. The S&P always follows the HYG and this suggests the S&P will move higher as long as the ETF continues to lead. Note the correlation over the last five years.
The relationship between oil priced and the dollar are intact BUT the dollar strength appears to be pulling away from a direct relationship. This is due to the fundamental problems in excess oil production and the glut is impacting the normal relationship.
Assuming there are no earth shaking headlines next week and earnings are at least decent, I would expect the market to continue to new highs and the lagging indexes could accelerate as those stocks catch up with the leaders. Portfolio managers are having problems with performance anxiety and are forced to chase prices higher in order to keep pace with their competitors.
This is a very competitive business and managers cannot afford to be too cautious when the market is breaking out. They have to hold their nose and buy something. If fund A and fund B are buying the hit stocks in a breakout then fund C through ZZZZ also have to buy to keep from being left behind. This herd mentality means they will all perform about the same and there is comfort in numbers. If the market were to suddenly reverse, they would all be in the same boat when it came time to produce the year-end numbers.
I would try to avoid being overly long but we do need to follow the trend until it ends.
Enter passively and exit aggressively!
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