If you blinked you missed the buying opportunities last week.

I was expecting a lot more negativity as we moved through the first week in 2017. The -160 point intraday decline in the Dow on Tuesday and the -140 point intraday drop on Thursday were brief and insufficient. In the last newsletter, I said to be prepared for a buying opportunity but I was thinking more in the 3% to 5% range, not an intraday dip.

The market is not cooperating with those investors who do not want to buy a market top. For three weeks the Dow, S&P and Russell 2000 have been moving sideways. That is an alternate method of consolidation instead of a sharp 5-7 day decline.

Sellers get to unload their shares at a casual pace as new buyers appear when the market is rising. There is no panic and eventually the sellers run out of stock and the market moves higher.

While the indexes, with the exception of the Russell 2000, have turned bullish, we have to remember we only had a four-day week where two of the days were heavy cash inflow days from end of year retirement contributions. Just because the market survived the first week without a decline does not mean it is bullet proof.

The Nasdaq was the most bullish with a solid breakout on both the Composite Index and the Nasdaq 100 Index. The Nasdaq closed over 5,500 for the first time and the $NDX closed over 5,000 for the first time. Note that both are highly visible round numbers.

However, the vast majority of the gains were produced by only a few large cap tech stocks. The market breath was poor. For example, Facebook gained $8 for the week. Amazon gained nearly $50. Netflix gained nearly $9. A large cap only rally is unsustainable. We need more of the mid cap and small cap stocks to follow the generals up the hill into battle.

Until those generals take fire and begin to retreat the general public could view the breakout as a signal to charge into the market. However, everything will depend on the Dow next week.

The Dow missed hitting 20,000 by 0.37 of a point. It would have only taken an additional 6-cent move by any Dow stock to lift the index to that 20,000 level. However, resistance from 19,950 through 19,990 remains strong. We probably could have tagged 20K if it were not for the Florida airport shooting headlines. That caused cautious investors to pull back ahead of the weekend until the facts became clear. Was it a terrorist event? Would there be more?

Assuming there is not a geopolitical event this weekend and no overseas markets go into meltdown, I would expect Dow 20K to be hit on Monday.

Originally, I was concerned it would turn into a sell the news event. However, after three weeks of consolidation, I no longer believe we will sell off materially once it happens. Touching 20K is not the key point. The Dow needs to power through 20K and close significantly higher to trigger what could be significant short covering.

Unlike the NASDAQ the few big cap techs were unable to power the S&P significantly past resistance at 2,275. There were sellers but the surge in those big cap names overcame the weak volume to close the S&P at a new high.

The traditional link between the Nasdaq and the semiconductor stocks diverged last week with the semis lagging and the Nasdaq surging. This is the big cap impact again. AMZN, NFLX, FB, AAPL, GOOGL are not chip stocks and they accounted for more than 25% of the Nasdaq move.

Several months ago I presented the following chart explaining how far an eventual break out or break down could run. For most of 2015-2016 the S&P was stuck in a 324 point range between 1820 and 2134. Technically, when that range finally breaks we should see a 324 point move in the breakout direction. We have clearly broken out to the upside and the target is now 2,458.

Also, after a brief bearish cross the 10 month average is now breaking away from the 21 month average and that suggests the gains should accelerate. This is a very long-term chart and movement happens in slow motion.

I have mentioned several times that the market breadth is shrinking. The small caps have been the weakest index over the last couple weeks but they have not yet broken down. The cumulative A/D line is nearing a five-week low. The MACD roll over three weeks ago. Note that the A/D line on the S&P is about to reach new highs. This is identical to the chart of the Dow. However, despite the Nasdaq breakout to a new high, the A/D line is showing the same indecision as the small caps. This is another confirmation the Nasdaq is being pulled higher by only a few stocks.

The Bullish Percent Index on the S&P finally showed a slight uptick last week. It had been stuck on 70% for two weeks and threatening a decline. This is the percentage of stocks on the S&P that have a buy signal on a point and figure chart. The minor improvement suggests the S&P internals are still struggling.

I do not show this chart very often but this week it illustrates the big cap strength. This is the S&P-100 ($OEX) or the 100 largest cap stocks in the market. Note that the percentage of stocks over their 200-day average has risen to 81% or 81 stocks in the case of this index. This is approaching a three-month high. This particular chart and indicators is known as the Carlucci Indicator.

In theory Carlucci said enter the market if the percentage was over 65% and two of the following exist.

RSI rises over 50
MACD black line over the red line
Slo Sto black line is over 50.

Based on his rules, this is a buying opportunity. The MACD has not yet crossed but the other two indicators are strongly over their thresholds.

Lastly, the Wilshire 5000 index is at a new high and the RSI and MACD is positive on a quarterly basis. This is a long-term chart and tends to ignore the day to day noise in the market. This is more for investors that hold stocks rather than options but it is good confirmation of the current long-term trend.

With only four trading days behind us for January, it is impossible to form any real opinion about the rest of the month. There are so many conflicting views about selling before the inauguration, selling after the inauguration, weak earnings, tax selling, etc that you could go crazy trying to build a case for any market direction. With the S&P and Nasdaq at new highs and the Dow likely to hit 20K this week, the only fly in the soup is the weakness in the Russell 2000. However, the Russell has not broken down. It is just not breaking out.

I am moving more into the bullish camp this weekend and that means we must be near a correction. The market always moves contrary to what the most analysts expect. However, we need to trade in the direction of the trend until that trend changes. I would just use small positions and a small number of positions until we are past the inauguration and have a better idea what the earnings look like.

Enter passively and exit aggressively!

Jim Brown

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