The end of the budget battle and positive comments on China lifted the indexes to new levels.
I feel like I am writing this from the Twilight Zone this weekend. The market remains very overbought but bad news is being ignored and good news produces monster rallies. In real life this is what we want to see. In any other chart picture this would be bullish. However, after 8 weeks of gains from the Dow, Nasdaq and Russell, I have serious worries about the market's ability to keep posting week after week of gains without a rest.
We did have some minor dips over the last couple weeks and maybe that was enough to equalize the pressures and allow sidelined investors to enter new positions. I hope that is the case.
As I wrote in the Option Investor commentary, the major levels we are currently targeting are acting like tractor beams to pull us higher. I am afraid that once we get there it could be a sell the news event. Many times the markets will target a specific level for several weeks and once there, the rally fizzles. It is like the dog that catches the car, he does not know what to do with it and sometimes gets run over by being stupid and running in front of the wheels.
We do not want to be stupid and fully invested when this current streak of eight weekly gains comes to an end. We need to be observant and ready to exit the moment a dip is not bought.
I also do not want to be Chicken Little and continue to warn the sky might fall while we watch the market soar into the heavens. The trend is our friend until it ends, and I am just suggesting we look for dips in the road ahead while we enjoy the ride to higher highs.
It would be nearly impossible to look at the chart below and not be bullish. The A/D line for the S&P is at a massive new high and no weakness in sight. Across the entire market advancers were roughly 3:1 over decliners on Friday. On the S&P advancers were 7:1 over decliners. That is the strongest since January 18th when they were 10:1 in favor of advancers.
Another example of the overbought conditions is the 92.5% of S&P stocks now over their 50-day moving average. That is the most since March 2016. Just remember that the sharp dive in December turned the averages lower so the stocks did not have to rebound as far to move above them. This is still bullish, but it has to be taken in context. The percentage over their 200-day average has risen to 61.4% and moving closer to the September highs.
Volatility has fallen below 15 on the VIX and a four-month low. However, remember we spent five months at 12 back in the summer. It would be even lower today were it not for the market hiccups on the 7/8th and 14th. Each of those declines spiked the VIX again. There are some volatility-based funds that buy stocks as volatility drops and then sells them as volatility rises. They have been doing well in recent weeks.
One of those volatility based ETFs is the SPLV or S&P-500 low volatility ETF. This is the 100 S&P stocks with the lowest volatility. It is rebalanced and reconstituted every quarter. That means the lowest volatility stocks for the last quarter are in the ETF for the current quarter. Stocks in rally mode typically have low volatility where stocks declining or struggling to pick a direction have higher volatility. Unfortunately, there are no silver bullets in the market. Every strategy has its negative points and the market always has the edge just like the house has the better odds in Vegas.
I am impressed with the chip sector. The chips continue to lead the Nasdaq higher and are actually pulling away from the index. The FANG stocks with the exception of Netflix are moving lower. The Nasdaq only gained 0.6% on Friday while the Dow gained 1.74%. This was due to the decline in the FANG stocks.
The biotech sector was also a Nasdaq supporter. The $BTK broke out to a 4-month high after three weeks of consolidation from the January gains. The sector was due for a breakout and I was early when I tried to play it two weeks ago.
The financial sector also broke out to a 2-month high on Friday. When you get chips, biotechs and financials all positive at the same time the Nasdaq and Russell 2000 are going to be in rally mode.
The Russell 3000 broke above the 200-day average and is closing in on strong resistance at 1650-1660. This is the 3,000 largest stocks in the market and for all purposes this is the market. If the R3K can move over 1,660 we could add a couple hundred S&P points before the R3K tops out at 1,740.
The S&P resistance that corresponds to the R3K is at 2800-2815. If by some chance we were able to break through that level the market could catch fire from all the price chasing. Any sidelined investor would be racing into the market for fear of missing out. (FOMO)
The trend is our friend until it ends. As long as the China news continues to be positive and the potential exists for a successful agreement, the market should remain positive. There is a good chance any actual agreement could turn into a sell the news event but maybe not on the day of the announcement. The next 48-72 hours would be the key. Investors have their eye on the prize and there is always the chance it turns into a pile of paper tied up with a nice bow to confuse consumers into thinking it was a great deal. Investors will not be easily misdirected and even a good deal has already been priced into the market.
Enter passively and exit aggressively!
Send Jim an email