The markets rocketed higher on Mon/Tue but stalled at key resistance across all indexes.
The short squeeze was powerful. The two-day ramp blew through prior resistance that had held for weeks and powered the indexes to new high resistance. In the case of the Nasdaq it was new highs.
The indexes all stopped right at resistance with the exception of the Nasdaq and the Russell 2000. The small cap index closed at a new high on Wed/Thr before collapsing on Friday.
Back on March 1st, the indexes all surged to new highs that lasted only one day. The decline began immediately and a new rebound came two weeks later that stalled just short of the single day high and created the current resistance level.
On the NYSE Composite Index the resistance level from mid March is 11,625. The index tried for three days last week to break that level and failed.
The Russell 3000 index ($RUA) also failed to break through new high resistance from March 1st with attempts on each of the last four days. In each case, the index did not close far below and remains within striking distance.
The Vanguard Total Stock Market Index (VTI) also came to a dead stop at 123 and the March resistance high.
The S&P-1500 Composite Index failed at 556 and the resistance from March.
The point I am trying to get across is that this was not just the 30 stocks in the Dow or the 100 stocks in the Nasdaq 100. The indexes above cover nearly every investible stock in the market and each index has over 1,000 components.
The resistance failure was market wide. Buyers either lost their conviction OR fund managers are sell stock in small amounts to retail buyers who suddenly turned bullish last week. This is called distribution and it happens at market highs. Portfolio managers decide to lighten up on their holdings in a way that does not crash the market. The small lot selling is consistent and persistent as long as prices do not decline significantly. Should that happen and managers feel the market is rolling over they will hit the sell button and begin dumping shares.
We cannot know if it is distribution until several days have passed but the indications strongly suggest that managers are selling stock at the highs.
This could be because of the calendar as we head into the "sell in May" cycle or it could be because of the outlook. With the new administration not likely to get anything signed into law until before the August recess at best and by the end of 2017 at worst, there is nothing to keep managers incentivized into holding their long positions.
There is a very good chance we could see this pattern turn into a double top formation. The market has not sold off materially since October and there are plenty of profits to be protected.
The VIX is at a 3-yr low after a 10-year intraday low on Tuesday.
On the positive side, the energy sector has been negative for months and the calendar works in our favor on energy. The refiners are ramping up production and were at 94% last week. We should begin to see some material declines in crude inventories that sill support prices. If the energy sector turns positive, it could help to support the broader market.
Lastly the percentage of S&P stocks over their 200-day average fell to 75.8% on Friday and very close to breaking below the 75% range despite the new highs in the market. The big gains last week were due to a few megacap tech stocks while the broader market was starting to fade.
This could be a pivotal week for the markets. The first two weeks of earnings are over and more than half the S&P have already reported earnings. The earnings excitement that draws traders into the market to bet on earnings, has begun to fade. After Apple and Facebook next week, the interest level is going to drop even more.
Add in the budget battle in Washington, the FOMC meeting on Wednesday and the French election event risk and there could be some challenges to the market moving higher.
At this point, we need a catalyst to cause another spike higher. Other than Apple's earnings, I do not know what that might be.
Enter passively and exit aggressively!
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