Stocks struggled on the session, a second day for the growth indices, the first session for DJ30, SP500 and semi-growth index NASDAQ. Anticipation of a pullback is one of the reasons we banked some gain late last week. Another reason was of course the 5 days or more of upside prior to Friday, and on top of the move since just before the election, those are good times to bank a bit of gain as we did Friday and much of last week.
So, on Monday stocks started flattish then, unlike last week's sessions, did not find a bid. No low to high, no high to higher. After oil stocks set the high early in the session on a gap thanks to a non-OPEC member production deal, the rest of the session was mostly backfilling.
SP500 -2.57, -0.11%
NASDAQ -31.96, -0.59%
DJ30 39.58, 0.20%
SP400 -0.62%
RUTX -1.08%
SOX -0.79%
VOLUME: NYSE +12%, NASDAQ +2%. Volume moved back above average on NYSE, faded more on NASDAQ but remained above average. Heavier downside trade shows a bit of distribution, higher volume selling of shares.
A/D: NYSE -1.8:1, NASDAQ -2.2:1. Nothing major, basically in line with the upside breadth seen on the upside move.
Sure enough there was a lot of scapegoat finding, starting with the defense contractors as President-elect Trump tweeted the F-35 fighter cost too much. They were lower pre-market, oil stocks were up pre-market, all came back toward each other as the day went on as the defenders pared losses and oils pared gains.
Perhaps this was simply a market that rallied a lot, was overdone near term, and is pulling back. Throw in a VIX up on upside sessions 2 days last week and you have another reason for stocks to back down a bit.
Again, a good time to lock in some gain, not the best time to acquire new upside positions. Thus we watched the oil stocks gap higher to see if they would provide entries. Some held some of the gain, some did not. Either way it was better to wait and let things settle out for new positions, to let the risk/reward come back to a more favorable ratio (as a refresher, 3:1 is what we look for).
It does not look as if this is over just yet. Some of the recent leaders took hits, e.g. retail, while many put in very respectable, orderly faded: financial, most metals, chips, industrial equipment, transports. Those trying to set up a move, e.g. ZIOP, KERX, BCRX -- many of the drugs and biotechs -- worked quietly on their patterns, a good indication for a rally ahead if they can continue working on it.
Most positions held decently enough though some got the dips such as DDS and we unloaded it. Others that were questionable held a key level so we left them but they have to show a bounce to keep us in.
For Tuesday it is a matter of whether the leaders keep the test in control, i.e. an orderly test, and if the potential new group of leaders continue building their patterns. This pullback was inevitable. Its depth is not. Thus, it behooves you to stay on watch for the test to show some bottoming indications (e.g. reversal of intraday selling to hold support, doji, gap and reversal) in quality patterns. Then when they show the reversal, that is when you move in to resume buying. As noted, this current move is still very young and likely not over as of the Monday close.
Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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