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Wednesday, December 20, 2017

Market Alert - The Close

Tax bill passage day and there were several laps around the White House with the gala, one-sided, celebration. Despite the panning of the bill that led to a very low approval rating for the legislation (similar to that of the Reagan tax reform), the bill contains some very good long term structural changes that will really help economic output. More than that, many working class people will see benefits coming in February with the increased tax credits and deductions. Pass through businesses that pay quarterly taxes will pay less as the tax rate has dropped to 20% on the first $350K of income. Pretty good stuff even near term.

Even with the fanfare at the White House, stocks were less than excited, but that was as expected as a lot of gains were built in anticipation of passage. On the other hand, there was darn little serious selling, and some areas such as oil stocks broke sharply higher.

Thus, overall it was another grudging, and thus very solid, test of the recent breaks higher. The indices closed mixed with SOX and the small and midcaps positive, the large caps down but just slightly. Basically another down session but a consolidation session without a lot of selling overall.

SP500 -2.22, -0.08%
NASDAQ -2.89, -0.04%
DJ30 -28.10, -0.11%
SP400 0.15%
RUTX 0.22%
SOX 0.70%

VOLUME: NYSE -8%, NASDAQ -10%. Even farther below average trade on NYSE and NASDAQ trade fell below average as well, indicating no heavy selling, just consolidating and profit taking. Exactly the action the upside wants to see.

ADVANCE/DECLINE: NYSE and NASDAQ both just slightly positive with advancers edging out decliners. Solid action on a pullback.

That leaves many stocks in good shape in rather normal tests of recent moves. Testing, but overall in good shape. As noted last night, we anticipated this pullback and we also anticipate it will set up new buys. Indeed, even after a short test there are stocks setting up right now. AAPL was under pressure with other FAANG stocks and to be safe we exited with trailing stops and modest gains, saying when AAPL completes the test we will move back in. Well, AAPL tested near the 10 day EMA and rebounded to a doji; it may be ready to go again already.

Chips were also up as the SOX and SMH gains show, but even so, many of the patterns in the group are not that great in terms of further upside after this bounce. INTC continues its great move, SWKS looks very interesting while CAVM and MRVL sport decent patterns (but cannot seem to find lasting bids), but many have rebounded from sharp losses and are now engaging with important resistance. More work to do on those.

Chips are key for the market and have shown so for the past few years. Perhaps the market is ready to divorce form them but I doubt it. Thus, continue to watch how these stocks perform as they bump that resistance.

The nice aspect is that if stocks in general continue this pullback, that gives chips time to further work on patterns and perhaps set up better upside potential. That is how a pullback works: digests gains, sets up new upside potential, and lets damaged patterns work on healing.

The question that comes to mind is whether two days are enough rest. For some perhaps, for most no. That means you watch great stocks that are testing to spot when they look like they are ready.

At the same time, sectors such as oil are breaking higher. Oh boy; those have been as gun shy as a deer getting a drink in the open in hunting season. Great patterns that keep balking at great moves. Nonetheless, there are good breaks and we have bought into some of them the past two sessions. Hope those testing stocks get their tests over with sooner than later.

We will continue looking for entries with an emphasis on really strong stocks, but also watching newer issues and sectors that are showing money moving their way. Not all of those are 'name brands' but can return big gains. While there may not be a lot of entries over the next week as the gains are digested and consolidated, it is our view that with the tax cuts there will be continued anticipation of gains ahead.

Indeed, afterhours announcements of employee bonuses and capital investment are coming in. T is giving a $1K bonus to 200K employees and is going to invest $1B in the US in 2018. FITB is also giving $1K bonuses and increasing its minimum wage. CMCSA is giving $1K bonuses to 100K employees and will spend in excess of $50B in cap ex over the next five years. Good things.

Have a great evening!
Jon Johnson, Chief Market Strategist
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