After the strongest three day gain for the S&P since October 2011 the markets failed to sell off on Thr/Fri. In theory, that suggests the big selling is over and a continued rally is possible. Paraphrasing Yogi Berra, "theory rarely works in practice."
There are two keys for next week. The first is Dow resistance at 16,500. The Dow came to a dead stop at that level on Wednesday and then faded into the weekend. The Dow must break through that level for a continued market rally to have a chance. The second key is the 1,950 level on the S&P-500. The S&P failed to reach that strong resistance last week and failed at the weaker resistance at 1,927 before fading to 1,917 at Friday's close.
However, the S&P only lost a nickel on Friday. After gaining more than 1% for three consecutive days for the first time since 2011 the failure to really take profits on Thr/Fri suggests the major sellers are done. Anyone still interested in dumping a lot of stock would have jumped right on that failure at 1,927 and driven the market lower again. That did not happen.
The Russell 2000 also posted a 5 point gain on Friday +4% for the week. The Semiconductor Index ($SOX) posted a 5% gain for the week. The Dow Transports gained +3.4% to extend their gains from the prior week. Bullishness or in this case short covering is breaking out all over.
Helping lift the market was a nearly 11% gain in oil prices. With the correlation between oil and the S&P at roughly 80% the rise in crude allowed the S&P to move higher. Many of the energy stocks saw decent gains despite negative headlines about potential dividend cuts and bankruptcies.
The Dow Transports have rallied +13.7% since the low at 6,403 on January 20th. With oil prices low and the headlines over the Zika virus fading the airlines are soaring. Delta has rebounded +16.7% since the February 8th low. A positive transport sector is always positive for the Dow industrials.
The biotech sector rebounded +11.4% from the 2,575 low on the Biotech Index ($BTK). This lifted the Nasdaq and the Russell.
The market rebound was broad based across all sectors and the volume was strong for the first four days. The volume was weak on Thr/Fri when the market was weak. Friday was option expiration and we only traded 7.5 billion shares. When determining market direction follow the volume. The direction with the heaviest volume is the direction the move will likely continue.
We were knocked out of more than half of our positions and I am recommending we reload Nike and General Electric. The declines were purely market related when the S&P dipped to 1,810 and a two-year low.
The S&P futures are up as I type this on Sunday night and the Asian indexes opened higher. It is still early and there is a lot of darkness before the dawn. It appears we are going higher on Monday but we will not know is the opening bounce will be sold until we get there.
I apologize for not getting the newsletter out last Monday evening as expected. I did not get back in town from my son's wedding until late and I was not mentally up to the task.
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