It would really be nice to reach a point in the market where we could just relax and enjoy the trend for 2-3 months without worrying about what the next week will bring.
Unfortunately, it will never happen. Regardless of how dramatic a move the market is making we will always have to worry about what will happen in the future. In our current case, the markets are up sharply and there is no material sign of an impending decline. Support is holding, no profit taking has appeared and the paradigm has apparently shifted from bonds and dividend stocks to financials and industrials.
Our worry for next week is the potential for profit taking as analysts whip out their downgrade pens and begin to slash ratings based on price.
There was a story out this weekend that could send the markets into overdrive. Trump, Pence and Mitt Romney met to discuss a potential cabinet appointment. Some analysts believe that would be the crowning achievement of the Trump selection process and would solidify the idea that the upcoming administration will be a game changer rather than a continuous stream of disturbing headlines.
The article suggested a Romney appointment would put the markets into overdrive. However, if that were the case, what happens if Romney declines? Does that send the markets careening back into a bearish direction?
I seriously doubt it but that is just one example of how everything impacts the markets and we may never be able to just launch a bunch of positions and then go on vacation for three months. I went on vacation for a week back in 2000 and it cost me a fortune. I will never do that again.
As traders, we have to continually monitor the market with an eye on support and resistance and our other eye on economics, headlines and politics. Long-term investors ignore all the signposts at their peril.
I was talking to a long-term investor several weeks ago about selling his position in Amazon when it was around $840. I explained that Amazon had a habit of selling off between Black Friday and the end of January. In some cases, it was a significant drop of $200 or more. He said it did not make any difference because he was a long-term investor. Ten years from now Amazon would be "well" over $1,000. While I agree with him in theory, I have seen too many stocks that had Amazon like charts at one point and then events changed and today they are only a fraction of their original price.
Here are some painful memories for people who were buy and hold, long-term investors.
Lastly, one of the stock rockets of the Nasdaq glory days was Microstrategy. On a split adjusted basis the stock traded at $3,300 at the highs in 2000. In reality, I think it was only about $800 or roughly the level where Amazon trades today. People who bought the hype on the way up and held on, were crushed at the bottom.
The point to this story is that things change. The market changes, the stock story changes, competition changes, products evolve and valuations evolve. Nothing ever grows forever in the investing world. Amazon's PE of 170 today could correct if the company focus changed or the investing public grew tired of a company that rarely posts a profit. While I do not see that in the near future, we should never grow complacent in our holdings. What would happen to the market if another 9/11 or worse were to occur on Monday? It could happen at any time.
The market today could be on the verge of breaking out to a new leg higher. With Tom Lee projecting 2,325 by year-end and others predicting 2,500 in two years, we could be getting ready for a major bull market. However, analyst predictions are only worth the digital ink they are printed with. The market makes its own decisions.
Wharton professor Jeremy Siegel has been predicting Dow 20,000 in 2016 for most of the year and that was back when the Dow was just barely over 16,000. Of course, Siegel was also predicting 10% earnings growth in Q3/Q4 as well. We may actually see Siegel's prediction come true but not for the reasons he was claiming. The election changed the course of the market and could change the course of the country and Siegel was not even considering that back in March when he was making his predictions for year-end.
We need to remain focused on the short-term market patterns so we are not surprised by the long-term changes.
The Dow surged 950 points the prior week and gained only 20 last week. However, that was remarkable in its own right. The Dow did not decline after the monster gains. The pattern of higher lows suggests investors are still looking for a dip and they are willing to buy even the slightest decline. That could be signaling a pending breakout next week if the bullish Thanksgiving trend continues.
The S&P is my flash point to watch for next week. If the S&P can move over the prior high at 2,190 and extend its gains even a little bit, I think we could see some short covering and price chasing by funds. Traders that shorted the month long stall at the highs back in August are probably still in denial that the index will push through those levels.
Portfolio managers are probably keeping some cash in reserve hoping for a decent dip on profit taking to add to positions. If that dip never appears and the S&P breaks out over 2,190 they will begin to throw cash at the market in an effort to not be left behind. We could see another sharp spike higher if that occurs.
One chart that is both scary and promising is the Dow Transports. They have exploded higher and are confirming the Dow gains. The Transports have to close over the prior high of 9,198 in order to give a Dow Theory buy signal the transports must also breakout to new highs. While they are already confirming the Dow move, the next major signal would be a new transport high. The index closed at 8,856 on Friday putting it about 350 points below a new high level. The transports have gained about 800 points over the last two weeks or 9.7%.
Another factor for the market remains the biotech sector. Since the election, the sector has gained roughly 19% because the Clinton price control threat evaporated. The $BTK index has resistance at 3,475 and we need to see that resistance broken with another big gain. The Nasdaq and the Russell 2000 need that support to continue their moves.
Lastly, the semiconductor sector has to continue its gains. The Semiconductor Index has gained 9% over the last two weeks and appears to be accelerating. We can think Nvidia and AMD for the recent sprint higher. However, big cap chip stocks like Intel are still lagging. We need for the laggards to break out of their doldrums and contribute to the SOX gains. This is a major Nasdaq component that can help lift the index higher.
Currently the $SOX is leading the Nasdaq by a wide margin and we want that to continue because eventually the Nasdaq will accelerate to catch up.
The two week rebound has significantly improved the internals. The percentage of S&P stocks back over their 50-day average has risen from 27% to 59% in only two weeks. The percentage over the 200-day improved from 53% to 65%.
The percentage of stocks with a buy signal on the Point & Figure charts has risen from 50% to 61.4%. Compared to the 77% in August when the S&P was at the same 2,185 level, this is significantly lower. This is due to the damage done in the two weeks before the rebound.
The worry for this week is the potential for a double top on the S&P and Nasdaq. Since the Dow and the Russell 2000 have already broken out, I feel this possibility is low. However, we need to be prepared just in case it does happen. Keep those stops in place because it is always better to look back and say "I am glad I got out" instead of "I wish I had gotten out." There is always another day to trade as long as you have capital to invest.
Enter passively and exit aggressively!
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