Many times we have a single index or two lift the market higher because of the outperformance of several stocks in a specific sector.
Last week the biotech sector refused to decline and the big cap tech stocks began setting new highs. That would appear to be the age old story of a few stocks dragging the indexes higher but the broad market indexes were sticking right to the existing road map.
The Russell 3000 ($RUA) set a new high close at 1,422 on the prior Wednesday and then declined to support at 1,390 this Thursday. That was a minimal 2.2% decline in six days. Analysts have been calling for a 3% or greater dip but that 2.2% may be all they are going to get.
Support at 1,390 appears to be solid and Thursday's decline stopped at 1,393 rather than actually hit that support level. When stocks or indexes reverse only a few cents or points before hitting support, it means there were investors waiting and they bought the stock early rather than wait for the actual touch. Too many times active traders miss a trade because they put their entry triggers right on or below a support point. In this business if you snooze you lose and so they are buying in advance of the expected support level.
In this particular case the dip buy may have been premature. The oscillators have turned bearish and the Friday rebound was minimal. This could have been just a cleanup day for shorts after a six day decline.
However, the market missed a perfect opportunity to sell off because there are still more buyers than sellers. The buyers are simply looking for better entry points on the dip rather than buying the highs.
The Vanguard Total Stock Market Index (VTI) is showing an identical pattern to the Russell 3000, which is not surprising since a 5,000 stock index should be roughly similar to a 3,000 stock index except the VTI has a lot more small cap stocks. The R3K is the largest 3,000 stocks in the market while the VTI includes nearly all of the investable stocks on the NYSE and Nasdaq. The VTI includes a significant number of microcap stocks to reach the 4,900 total stocks. The NYSE has 2,800 stocks and the Nasdaq 3,100. The VTI is the combination of both.
The point I am trying to make is that we are seeing a broad market move rather than just a few stocks on the Dow or the Nasdaq 100 big caps.
The biotech sector was supportive of the broader market last week. The Biotech Index ($BTK) closed at a new 52-week high on Friday at 3,512 with nearly a 1% gain. That is deceptive because the index did fall sharply on Tuesday but was one of only three indexes/sectors to post a gain for the week. The biotech index gained 18 points for the week, semiconductors 18 points and the Nasdaq 100 12 points. Strangely, the financial sector lost ground despite the pending rate hike.
There are 165 biotech stocks in the Nasdaq. Biotechs represent 7% of the Russell 2000 by weighting and 3% of the S&P-500. The Russell 2000 Growth ETF (IWO) has 14% biotechs by weighting.
The sector offsetting the biotech gains and giving all the major indexes balance was the energy sector. The Oil Index lost -2.5% and the Oil Service Index lost 5% for the week.
Fortunately, the drop in oil prices is seasonal and the sector should turn around over the next couple of weeks and be supportive for the next several months.
I started this commentary explaining how the broader indexes/ETFs are all behaving identically. I think this is relevant given the volatility in the various sectors. Overall, the market is maintaining a bid and there does not appear to be any move by investors to close positions or even buy insurance with options.
The volatility index is near three years lows and averaging levels not seen since the financial crisis.
It would appear on the surface that the market has a solid base of bullish investor sentiment even though the AAII Sentiment Survey showed a sharp move towards the bearish camp last week.
We have gone through multiple periods of distribution and the market keeps moving higher. We saw several days of negativity last week and yet the indexes are still within spitting distance of their record highs. There is nothing pointing to an impending decline.
That does not mean a dip will not appear, only that there are no signs. The convergence of multiple, potentially market moving events, next week could be just a wall of worry for the bulls to climb. However, there are still pitfalls ahead. If the market decides the changes to the tax code are going to be pushed well into the future, Citigroup believes we could see a 10% to 15% correction.
Despite the concerns spelled out above, I believe investors should remain long until the trend actually changes. The minor declines from last week are just noise as was the minor rebound on Friday When you have an index at 20,800 posting gains and losses of 2-3 points a day, this is consolidation rather than preparations for a decline. That could change in a heartbeat if one of those coming events produced an unexpected surprise but until then, the trend is our friend.
Enter passively and exit aggressively!
Send Jim an email