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Monday, February 13, 2017

Market Alert - The Close

New highs all around outside SOX as RUTX finally cracked to a higher high. SP500, DJ30, NASDAQ all closed near session highs with solid gains. RUTX made that high along with SP400, but both closed well off the intraday high, showing doji on the close. New highs but not so grand of action. SOX moved higher early but then once more could not hold the move, closing the session again at the 10 day EMA.

SP500 12.15, 0.52
NASDAQ 29.83, 0.52%
DJ30 142.79, 0.70%
SP400 0.28%
RUTX 0.25%
SOX 0.28%

VOLUME: NYSE 1.6%, NASDAQ -0.5%. Stagnant, still below average on NYSE, slipping back to average on NASDAQ. Still not a lot of volume power, particularly on NYSE, as stocks move higher, but again, they are moving higher as the sellers remain on the sidelines.

A/D: NYSE 1.5:1, NASDAQ 1.4:1. Extremely tame for new highs on the small and midcap indices.

What great economic news drove the action? None really. More of the 'phenomenal' tax plan rally, a renewal of the original Trump rally. Okay, it was more than that. Trump didn't tweet anything that upside the status quo, instead golfing with Abe of Japan and discussing working together versus fighting, ignoring the North Korean ballistic missile launch over the weekend (versus acting panicked), meeting with Canada's Trudeau and discussing fixes to NAFTA, immigration, and basically playing nice.

That was enough to keep the Trump move renewal going. 'Stock nirvana' as they put it on 'Fast Money.' Fear of missing the upside. Fear of a melt up (Dennis Gartman said the melt up was on).

So much fear of Trump yet he convinces corporate executives to think American and they promise investment and hiring in the US -- not just domestic companies but foreign companies. Many foreign leaders and governments talk angrily about Trump's prior statements, yet he meets with them and the issues melt away. He hits the right notes with the Chinese, he gets along famously with Japan's Abe, he talks seriously and pragmatically with Canada's Trudeau, and on top of that he promises 'phenomenal' tax changes. Given his success elsewhere is it a surprise the market buys into it -- literally?

Surprise or not, the market is buying. Metals, industrial equipment (CAT, CMI, HON), construction (USG, FLR), big tech (CSCO, STX, MSFT, HPQ) were all strong. Restaurants, China, recent movers, were weaker. FAANG was mixed with AAPL, AMZN, GOOG up, FB, NFLX down.

Semiconductors showed a few great moves (e.g. XLNX), but more of the recent leaders paused or were involved in their continued test of the past week or so, e.g. MU, AVGO, AMAT, AMD. Still a very important group for the market, a bit ahead of itself after good runs, now testing.

Financial stocks were up and trying to clear recent highs. Some good moves, e.g. C, but many are still just flirting with a breakout. We were watching BAC all session and while it closed higher on better trade, it failed to hold a move over the late January highs in its range. They are not bad, just not quite the strength you want. At least not yet.

Three days straight up for SP500, DJ30, SP400, RUTX, four days for NASDAQ. At this juncture NASDAQ is ahead of itself, even the other indices that broke out from their lateral consolidations. Chips are a likely example for the rest of the market: early leaders they rallied ahead of the market, and last week as the rest of the market finally awakened again, the chips stated to take a breather. They already slowed the advance Tuesday and Wednesday, then faded to the 10 day EMA through Friday. Monday was more of the same.

If chips are a precursor index, then the great price break higher by the overall market to follow SOX and NASDAQ will face its own test. That is a no-brainer; all rallies get tested. The shot higher the past 3 to 4 sessions was quite strong as a breakout should be, and a test is normal. As there have been very few willing sellers to go against the gains, you would anticipate a normal breakout test, not a repudiation of the move.

That is what you would anticipate because there are no sellers, BUT also again be cognizant of the high bullish sentiment, low upside volume, narrow breadth, lagging MACD (on all but NASDAQ). The internals are not sold, not even good. Typically that results in a more serious selloff.

Recall that I said I expected a break higher even with these weak internal indicators. I also expected that rally to be the last one before a deeper test. That may or may not be correct; there may be another leg after this one is tested. Sentiment indicators are fickle in terms of timing, and the other internals can be lame for quite some time before a selloff occurs.

So, we have bought the move higher, but after this kind of break upside we will be inclined to wait for a breakout test by the indices, then if they hold and rebound, it will be incumbent up us to buy the leaders again and let them continue working for us. Again, until there is a serious reversal, and more importantly, strong, well-known leaders crack support and roll over, the bias is upside and the presumptive move is upside. The macro issues are still out there and are still issues, but they have not come home to roost at this time.

We bought some CLS, one of the chip-related stocks that rallied when many chip sector stocks paused or faded. Took some gain on USG as it hit our initial target, playing the plan for the trade. Sold some February 108 strike calls on the NVDA stock position with the idea of NVDA continuing lower to a 50 day MA test by the end of the week where we can either buy them back or if below 108 (and we are looking for a move to 104-105), let them expire. We passed on BAC as it was flirting with the prior highs but was not making a definitive move. MBT hit the entry and perhaps should have entered, but volume was extremely low.

A bit of caution with our positions, but working the move for our gain. If there is another good push higher by the indices on Tuesday, we will start looking at taking some more gain after what would be a strong move higher for the indices and the likelihood that a breakout is usually tested.

Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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