JP Morgan says "stocks are in a dead zone" as RUTX breaks to a higher recovery high while NASDAQ and SP400 move to new all-time highs. Sure they are not massive surges, but they are at least avoiding the 'morning after' reversals that each move to a higher high seemed to suffer.
Sure sounds a bit like exasperation as SP500 and DJ30 remain locked in their 8 week trading ranges, but those two indices are not the entirety of the market. Growth indices are growing upside as those stocks continue to come off of selloffs that turned to bases, that turned to breaks higher. They are providing the fuel for the advance thus far. That can end if those buyers decide to pull the plug, but the action Wednesday shows that is not the case, not yet.
SP500 -0.32, -0.01%
NASDAQ 8.02, 0.15%
DJ30 -11.98, -0.06%
SP400 0.35%
RUTX 0.61%
SOX -0.73%
VOLUME: NYSE -6.5%, NASDAQ +5%. NYSE trade sluggish as SP500 wends its way laterally. NASDAQ trade bounces above average for the first time in over 4 weeks as it puts in a higher high. That is overall positive but I note it was not a huge move higher. It is a continuation of the better volume on upside sessions seen on Tuesday, more reminiscent of the late July/early August advance, and it did occur at a higher high; always good to see higher volume on a move to a higher high, in this case two straight.
A/D: NYSE 1.7:1, NASDAQ 1.5:1. Somewhat surprising to see breadth this narrow when RUTX gained 0.6%.
NASDAQ avoided a selloff and indeed added, albeit modestly, to its Tuesday upside break. RUTX rallied nicely Friday, held the move Tuesday, then led the market higher Wednesday with another solid advance. SP400 showed the same action, also avoiding that selloff that was so common after a new break higher.
SP500 and DJ30 are not moving to higher highs though that does not make them a pile of warm sauerkraut. They look as if they are attempting to put in higher lows at the 20 day EMA, midrange in the trading range after bouncing up off the range lows. So, yes, SP500 and DJ30 can perhaps be termed in a 'dead zone,' but even those indices are trying to put in a higher low in their ranges, and that often proceeds a breakout attempt.
SOX was the dog of the day, falling almost three-quarters of a percent as it broke the 10 day EMA for the second time since this rally started in early July. It led to the recent highs and some money is working elsewhere as investors use the AMD announcement of a new offering and MRVL's lowered guidance as reasons to take some gains and recycle money elsewhere.
We recycled some of that money ourselves. We sold the rest of the AMD position and picked up a motley crew: CX, FL, KITE, XXIA -- rails, athletic shoes, drugs, Chinese internet. But that is the market right now, i.e. many stocks from many different areas coming off long selloffs, bases, and tests of initial breaks higher. That is not a bad thing. That is how runs continue to move. We continue hearing the bears growling around but we also see these stocks forming that described pattern and moving higher. We have seen this in retail, financial, metals, drugs, chips back when the move was younger -- money moves in, drives them higher, then reallocates to some new areas. That is hardly a market that is necessarily toppy. With the NASDAQ big names helping out, that is more fuel to the upside.
As noted, the buyers can decide to turn off the reallocation switch at any time and leave the market vulnerable to downside. It is September, a historically weak time for the market, and that can sometimes be a self-fulfilling prophecy. I truly believe that is a large part of the bearish calls by many of the billionaires and big brokerages. They see the economic issues, they see corporate profits falling, they hear the Fed speculating more about rate hikes and an end to easy money, they see the indices at or near new highs on light trade, and they are connecting the dots. Hey, it is compelling.
Compelling, but it is just a view, a theory. The indices are holding up and moving up in the growth areas, there are those good patterns still forming that we saw this weekend and still see now. As they are moving, we take advantage of them and use them to make money.
Perhaps they won't be the big home runs of the past BECAUSE it is September and the indices are already at highs and so many big names that control a lot of money are bearish. Yet, you see as on Tuesday that some of those bearish money controllers are rethinking their position (e.g. Morgan Stanley) and put money back to work upside. That can help propel the market higher for a bit longer as the bears turn back to at least near term semi-bulls.
Okay, so we play these patterns smart and take gains on them when the gains are there and mind the back door if some positions start getting squirrely. That way we take what the market gives without EXPECTING major runs. Play good patterns that have good upside potential without necessarily having to blast through resistance to make our gains. Take those gains when the plays hit the targets, let the rest run if things still look good. Do that until these patterns and the market starts to break. In short, trade the play, not the market. Expect nothing, take advantage of good setups, take the gain, get out if trouble starts. That way you take advantage of money making opportunities while not deluding yourself that stocks will always run higher on this move. Take what the market gives, right?
After all, SOX is having some issues right now, and it is a market leader. Sure it can cycle lower and test while other indices ascend in its place, but how it holds a test tells you a lot about whether the run is still in place with SOX just taking a breather or if the rally is losing leadership. As of Wednesday, the growth stocks outside of SOX are working quite well.
Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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