The next three weeks will be pivotal for the markets but the outlook is positive.
This is turning out to be a September to remember with another week of new highs. The last couple days saw minor profit taking but the market internals are strong. The next three weeks are normally the most volatile of the year. With the political cliffhangers moved out to December, there may not be much volatility ahead. Geopolitical issues are about the only thing that could wreck the rally and it will be interesting to see if North Korea calls the world's bluff and does something stupid. Short of actually launch a nuclear weapon over Japan and exploding it in the Pacific, anything else will probably be ignored.
The Fed meeting is behind us and the economic calendar is lacking any market moving events. There are a lot of Fed speakers this week and Janet Yellen also takes the podium on Tuesday. However, she has become very adept and avoiding sensitive issues and maintains a dovish stance. She is not likely to rock the boat.
The S&P set a new highs but was dragged lower on Thr/Fri by Apple and the rest of the big cap tech stocks. The internals on the S&P remain strong with the A/D line at new highs and market breadth strong. It was simply a matter of Apple contaminating the rest of the big caps and traders took profits.
The S&P moved in only a 12-point range since Sept 8th and that is very rare. The VIX has closed under 10 for the last several days as volatility is nonexistent. Resistance is 2,508 and that has held multiple times over the last week. Support is 2,500 and 2,485 followed by 2,450. With Q3 earnings beginning in early October, I do not expect a retest of uptrend support.
The Dow ran into resistance at 22,400 and pulled back slightly as the health care stocks declined on the potential for a repeal of Obamacare. The index rebounded Friday afternoon when John McCain said he would vote no on the bill and that was likely the kiss of death. Dow component UNH rebounded about $5 Friday afternoon on that news. That lifted the Dow off its lows and back to within 10 points of flat.
Resistance is 22,400 and again at 22,500 where uptrend resistance is currently resting. Initial support is 22,300 then 22,100 and then 21,750. That last step down would be dramatic and without some materially negative catalyst I do not see it happening.
The Nasdaq fought all week to conquer the 6,460 level and failed. Apple's impact on the rest of the large cap tech stocks was too much to overcome. Apple's decline erased 55 points from the Nasdaq. Support appeared at 6,400 and that level should hold without a seriously negative event.
Portfolio managers should be finishing up their Q3 restructuring and positioning themselves for Q3 earnings and a Q4 rally.
The Russell 2000 has been the strongest index over the last month with a strong rebound from the August lows. The Russell closed at a new high on Friday by a fraction of a point. This is bullish for market sentiment since portfolio managers will not buy small caps if they are afraid there may be volatility ahead.
There are a few earnings reports for next week with Dow component Nike on Tuesday after the close. They are not expected to be a major impact on the Dow on Wednesday unless they have a really strong move of 10% or more. The return of earnings reports should put investors into a buying mood.
The market does not need a negative catalyst to decline. Sometimes it just reaches a point where enough portfolio managers decide it is over priced and they take profits at the same time. With analysts now targeting as high as 2,700 (Morgan Stanley) on the S&P, the odds are good there will not be a sudden rush to the exits. This week is month end and there should be an influx of new money ahead of the Q3 earnings.
Should and could are overused a lot when referring to the market direction. While there are no negative catalysts on the horizon and plenty of positive events ahead, the market "should" maintain a positive trend. However, there is always the possibility for a volatility event. Try and maintain some cash in your account in case a buying opportunity appears.
Enter passively, exit aggressively!
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