A bit lethargic, a bit hungover after a strong upside session Friday led by the mega large caps. The large cap techs maintained their relative strength Monday even though NASDAQ closed negative -- just barely. NASDAQ 100 and SOX closed positive, NASDAQ flat. The small caps flopped and the midcaps looked uncomfortable as the House republicans talked of possible phasing in tax reform over 5 or more years.
Thus, the rally in small caps and midcaps that started almost to the day the pass-through tax rate reduction was announced, looks as if it could be over as money moves back to the old favorites, the FAANG and other mega caps.
The action in the indices, while muted overall, still demonstrated the new mega cap bias.
SP500 -8.24, -0.32%
NASDAQ -2.30, -0.03%
DJ30 -85.45, -0.36%
SP400 -0.74%
RUTX -1.15%
SOX 0.19%
NASDAQ 100 0.23%
There was some rough and tumble for the small caps -- though hardly a crash and burn -- but for the large cap indices, a day off with pay, a casual stroll in the park after increasing their market cap $200B in one session. After that kind of move a little pullback is not bad and indeed something we and many other expected.
There is some volatility outside of RUTX and SP400, namely SP500. Remember, bullish advisors is over 60 for the third consecutive week, and that 60's level has been the top of the range, fostering pullbacks and selloffs of various strength. Admittedly, the last one was not that severe.
DJ30: Basically untouched, now in a 4-day lateral test of the last solid rally as it waits for the 10 day EMA to catch up and try to push yet another run.
RUTX: Opened a bit lower and dropped below the 20 day EMA in a 24 point dive (1.5%) that was close to last Wednesday's low before cutting some of the loss by the close. The day did not ruin the RUTX' pullback pattern, but the steady, orderly pullback through mid-October has turned into a high point, volatile move from session to session. That kind of action shows an ongoing fight between buyers and sellers. If the tax negotiations swing back to favorable for the small caps, then it can recover.
SP400: Holding the same 1800 level it has traded around for 4 weeks, but was with RUTX and SP500, the midcaps turned volatile with sharp day to day swings, the same volatility impacting RUTX and showing that buyer/seller fight. For now the midcaps are holding the consolidation, weathering the storm.
SP500: Tested the 10 day EMA on the low, recovered to cut the modest loss. Still easily trending up the 10 day EMA though the SP500 mega caps have undergone their own back and forth volatility the past 6 sessions.
NASDAQ: Put in a higher high intraday but then backed it down to flat at the close, showing a doji. After the new gap higher Friday off the 20 day EMA test, this is likely just a continuation doji, i.e. a pause in the new break higher.
SOX: Last but of course it was positive so not the least. After a solid new break higher off the 10 day EMA Friday, SOX traded basically flat, keeping tempo with the rest of the indices. It shows some volatility a week to 2 weeks back but much less than the small caps, midcaps, and SP500, and it moved on through it with that Friday surge. That gives something of a roadmap for SP500, SP400 and RUTX to follow.
We picked up some ENPH and CREE (both related to chips/electronics) and sold out on some retail positions (TGT, KIRK). Sold TEX position ahead of its earnings this week; it may jump on them but it is lethargic compared to others in the group. Outside of that we let positions work if they will but frankly, you have to look at the large cap bias as being the way to move ahead in this market if the recent action becomes the norm.
Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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