After a stunning first week of gains the markets completed a repeat performance with the Dow gaining another 507 points on top of 576 points gained in the first week. The S&P added 43 points on top of 69 the first week. The Nasdaq added 124 on top of the 233 gained in the first four days of the year. These are astounding numbers and even more so since the markets were dormant the last two weeks of 2017. The S&P and Nasdaq had closed at two-week lows on the last day of the year.
Obviously, after a Dow gain of 1,083 points in nine trading days, the question is how much further it can run before profit taking appears. If I could look into a crystal ball and get that answer I would be loading up on either puts or calls depending on the answer. Nobody alive can positively tell you what is going to happen. We can only depend on our charts since there is no accurate crystal ball.
After two blowout weeks, you would expect the A/D charts to be positive and you would not be disappointed. The S&P is at another new high and there are no signs of weakening on this chart. However, the Bullish Percent Index ($BPI) chart gives us a slightly different view.
The BPI chart actually declined last week from its recent high. The damage was minimal with the percentage of S&P stocks with a buy signal falling from 83.2% to 82.0%. That only equates to a drop of 6 stocks and that could be from earnings guidance, a sector decline, etc. One of those stocks could have been Facebook with its $8 drop on Friday.
The percentage of S&P stocks over their 50-day average also declined slightly but definitely nothing to worry about. This is the normal noise associated with an earnings cycle.
Last week the S&P was 178 points or 6.9% above the 100-day average. That has increased to 205 points and 8.0% above the average. This spread is at a decade high and shows how significantly bought the market is ahead of earnings. To say we were priced to perfection would be an understatement.
Also, the RSI or relative strength indicator is at 83.42 and a level not seen since November 25th, 1996. On a weekly chart, it is 87.39 and that is a historic high on my charts but mine only go back to 1970. To say that correctly "it is the highest level in 48 years." Again, anything I could say about the index being overbought would be an understatement.
With the Dow up 1,083 points in nine days, it should be no surprise that the A/D line is at a new high. There is nothing to be learned from this chart.
The Dow is now 2,421 points or 10% above its 100-day average. That is also the widest spread I can find. The RSI has risen to 86.15 but it was actually higher on Oct 20th at 88.10. These are nosebleed levels. The Dow used the prior uptrend resistance of the regression channel as support last week. That current level is around 25,500.
I would be surprised if the Dow did not touch 26,000 this week but I would not be surprised if there was a sell the news event. That would be the fastest time between 1,000 increments in history.
The A/D line on the Nasdaq finally broke out of its sideways consolidation and it is now at new highs.
The Nasdaq is 571 points or 9% above its 100-day average. The uptrend resistance has been broken and should now be short-term support. The Nasdaq is slightly less overextended because of the repeated bouts of profit taking over the last six months.
The small cap S&P-600 is not nearly as overextended as the rest of the indexes even after the blowout spike to new highs last week. The index had consolidated for the prior four weeks and the spike was a burst of short covering when that consolidation ended.
The Russell 2000 came to a dead stop at uptrend resistance just below 1,600. The index posted a 1.73% gain on Thursday to punctuate the four-weeks of consolidation. This index is not as overextended as the big cap indexes.
It would be hard for any analyst to tell you this week that the markets are going to continue surging higher. I do believe we will see higher highs but I seriously doubt the indexes will continue their vertical climb. We are due for some profit taking but every dip will likely be bought over the next four weeks.
I would not be surprised to see the gains dwindle rather than suffer big losses. Everyone wants to be invested as the benefits of the tax reform are reflected in the earnings guidance, dividend and stock buyback announcements. As the Q4 earnings cycle begins to wind down, I personally expect the volatility to increase.
The trend is our friend until it ends but there is rarely any warning.
Enter passively and exit aggressively!
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