The markets took one small step backward last week after setting new highs.
I do not think you will find anyone that did not expect the markets to pause after the Dow posted 9 consecutive daily gains with 7 consecutive new highs. Betting on some profit taking would have been a wise move but only in a very short-term trade.
The declines were meaningless in the bigger picture. The S&P traded in a very narrow 12-point range and ended roughly in the middle with a 2 point gain for the week. That is hardly a significant decline. The S&P has traded in only an 18-point range since September 12th. Eventually we are going to get a catalyst that breaks us out of this range and the odds are increasing that the move will be to the upside.
When you stop and consider that North Korea actually threatened to launch a missile over Japan complete with an H-bomb warhead and then explode it in the Pacific and the S&P only dipped 4 points, I would say the market was nearly bullet proof.
Despite the minor weakness in the S&P over the last couple of days the advance/decline line remains at its recent highs. There is no weakness in the internals. The volume was light on Friday with only 5.2 billion shares but the advancers were 2:1 over decliners even with the Dow and Nasdaq 100 indexes negative. The Russell 2000 even set a new high. It is hard to say anything bad about the market under these conditions.
The Russell 3000 is the market of tradable stocks and the index closed at a new high on Tuesday at 1,485 and only closed 3 points below that level on Friday. This shows significant bullish sentiment and that the market has excellent breadth. Uptrend resistance at 1,486 is strong and held the index in check over the last several days but the trend is still intact.
I don't have an A/D chart for the Russell 3000 but the closest I can get is the NYSE, which is 2,400 stocks. The NYSE Index closed at a new high on Friday at 12,151.79. With the A/D line at a new high on the NYSE and the index itself at a new high, we have to accept the fact the rally is expanding even though the Dow was slightly negative. The NYSE actually broke through the uptrend resistance that has held the other indexes back.
The Dow posted a minor 2-day decline after 9 consecutive days of gains. I will take that tradeoff every time and we could make a lot of money with that trend. The uptrend resistance is going to come back into play around 22,500. Technically, the Dow could easily give back a few more points but the minor declines suggest that is not going to happen without a negative catalyst.
The Nasdaq had a tough week with multiple failures at the 6,460 resistance level. Apple is dragging the other big cap tech stocks lower and that kept the Nasdaq from breaking out. Despite the decline on the Nasdaq the A/D line closed at a new high. This is proof that only a few big cap stocks were weighing on the index while the majority of the tech sector was moving higher.
Assuming North Korea does not follow through on its H-bomb threat, there are no negative catalysts on the horizon to push the markets lower. With only three weeks before the beginning of Q3 earnings, portfolio managers should be adding risk in stocks they want to hold for the rest of the year.
As long as the A/D lines remain positive across the broader market, investors should continue buying any dips. Eventually the trend will end but it could be when the political threshold events return in early December. Until then, the trend is your friend.
Enter passively and exit aggressively!
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