Traders were shocked to see the market showing signs of life on Friday afternoon after two weeks of dormancy.
I feel like I am watching an old Frankenstein movie where the creature moves for the first time and the doctor declares "it's alive." The Dow and S&P had done nothing since the post election short squeeze on the 25/26th. They had gone dormant despite higher than normal volume. There were multiple headline events over the last two weeks but nothing could move the indexes away from the flat line.
Friday's gains came in the last few minutes of trading after late polls showed Macron well ahead of Le Pen in the French runoff. Add in a rebound in oil prices and traders decided to go long over the weekend in hopes of a repeat post election performance with another short squeeze on Monday.
The S&P set a new closing high but remains under the 2,401 intraday high from March 1st. Despite the lackluster movement over the last two weeks, the momentum indicators have turned positive. If we do get a Monday short squeeze it could lift the markets well over prior resistance and begin a new leg higher.
The Dow closed only a minor amount over 21,000 and it is either poised for a double top formation or a breakout to a new high. The old high from March 1st is 21,115. The Dow is not as bullish as the S&P or the Nasdaq but it is refusing to relinquish any points.
Uptrend resistance on the Nasdaq is 6,100 and that is exactly where the index stopped on Friday. Any material gains should trigger additional short covering.
The Nasdaq had a headwind last week as the semiconductor sector rested and pulled the tech index slightly lower. I believe the weakness is over and Nvidia reports earnings on the 9th. That should boost the sector. Remember, where the semiconductor sector goes, the Nasdaq will follow.
Oil prices have been very detrimental to the equity market. Oil declined roughly $10 in just over two weeks and crushed the energy sector. However, falling oil prices is also a detriment to the broader market because it suggests a lack of demand or weak economics. You would think that lower oil prices would stimulate consumer spending and increase corporate profits for anyone not in the sector. That does happen long term but the immediate impact is a decline in equities.
Oil has been declining despite the falling dollar. This is very unusual. They normally move exactly the opposite of each other.
The market breadth increased significantly last week and the Russell 3000 closed only .05 points from a new high. This is the real market indicator and it is suggesting we are going higher.
The advance/decline line for the S&P also suggests we are going higher. The cumulative line is back at its highs from March. This was the most bullish chart of all the index A/D charts.
The two weeks of dormancy saw the bullish percent index slip back closer to 70%, which is still good but well off the 80% just three weeks ago.
Lastly, the dormancy also caused the percentage of S&P stocks over their 200-day average to fall to 75.6%, down from 84% three weeks ago.
There are conflicting signals in the market but assuming Macron wins the election in France, the markets are poised for another short squeeze. I doubt it will be as violent as the last one but you never know.
We are now in the "sell in May and go away" period and nobody appears to be leaving. With S&P earnings up 14.7% in Q1 and similar numbers predicted for the rest of the year, there is no real reason to head for the sidelines. There is optimism in Washington, Wall Street and Main Street so it might take a significant catalyst to cause a major sell off.
With the Volatility Index holding at 10-year lows, the complacency is rampant. Is there a Black Swan event in our future?
Enter passively and exit aggressively!
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