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Monday, January 8, 2018

Market Alert - The Close

Slow start Monday as futures traded lower, but some bids returned, not massive, but enough to turn the stock indices, less DJ30, to positive for a fifth straight session, the fifth session of 2018. According to one of the market adages for a new year, if the first week is up, so is the market for the year. Doesn't mean it won't fall something during the year, but the general rule is higher.

SP500 4.56, 0.17%
NASDAQ 20.83, 0.29%
DJ30 -12.87, -0.05%
SP400 9.84, 0.51%
RUTX 0.12%
SOX 0.74%
NASDAQ 100 0.35%

VOLUME: NYSE +4%, NASDAQ +1.5%. NASDAQ trade was up and still above average, making it 4 straight sessions of gains on above average volume. Not bad. NYSE trade was up but still below average. Only one above average trade session last week, one in 13 sessions. Perhaps this volume speaks to the extension on SP500 and DJ30, i.e. not bringing as many buyers in.

ADVANCE/DECLINE: NYSE 1.4:1, NASDAQ 1.1:1. Still quite narrow as the small caps continue lagging the overall market.

Okay, if the market rises in 2018, how much higher? Some say 8%, some say more. Those in this office, others and myself, say we don't know. Doesn't really matter. If upside, we will play the upside as we have done, and leverage the gains far in excess of the market. In Q4 SP500 gained 6.1%. Our more conservative retirement accounts gained 80%. Our regular trading accounts were up 400%. We have added gains on top of that this year with gains banked Monday on AMZN (85% option gain), BZUN (45%), NTNX (300+% options), STX (200+% options). Last week, the first week of 2018, we added strong gains from CNIT, MSFTY, SIFY, YY, DCPH, ULTA, FLR, NOG, VCEL.

If the market decides to drop, we will take that same approach and play the downside to leverage the overall market move. And as noted, there will of course be drops, even if the market overall rallies again in 2018. The question that is most discussed right now regarding the stock market is whether one of those inevitable drops is near at hand.

You have heard my discussions of the extended DJ30 and SP500 with respect to the number of runs after leaving the 50 day MA as well as the percentage above the 200 day SMA (13.8% DJ30, 10.3% SP500). You have to watch them closely given their extended moves, watching for reversal action.

Neither index shows this kind of action at this juncture, and while several DJ30 stocks were lower Monday (the biggest drops DIS, PFE, GS, UNH, GE), they are not showing reversals of breakouts, a tell tale sign of a rally stalling as new breakouts fail to hold.

The other indices are in various stages of rallying. NASDAQ is on its fifth run off the 20 day EMA after leaving the 50 day MA. The fifth run is typically an indication of an extended move, and run five is often the last. That said, the FAANG stocks are not extended: they based from early/midsummer 2017 to late October into November when they broke out. Yes, after a week straight up for FAANG stocks they are near term extended and subject to a pullback to test, but they are not long term extended.

By the same measures, SP400 is at a new high but is not extended on the most recent move from the 50 day EMA, having tested it mid-November and well into its second leg higher off this test. RUTX put in another new high as well Monday, but it just tested its 50 day MA in mid-December.

SOX is an interesting story on market health. It rallied well into late November 2017 then started to test. That test turned sharp as it dropped to the 50 day MA in one session after a modest initial test. It broke the 50 day in early December, but then started to recover through that money and on into the first week of 2081 when chips broke back over the 50 day MA. That rally continued every session last week and through Monday, with SOX tapping the late November prior post-2009 recovery high.

What does this mean regarding SOX? SOX did roll over, breaching the 50 day EMA and falling a 'correction' level 10% from the November high. The sellers, however, could not close escrow and keep SOX down. Now it has recovered all of the loss.

While SOX still has to show it can take out that prior high and put in a new post-2009 high, and a double top is a definite possibility, the sellers were not strong enough to take it lower and were unable to hold SOX down.

SOX will show whether it can continue upside or if this recovery was its last upside gasp for a while, but the point is this was a 'normal' correction for an index and not a major top.

That is something I discussed last week, i.e. the all or nothing mentality regarding market moves that is taking over much of the discussion. I suppose it is not surprising as this type of black or white dichotomy exists today for in many areas, e.g. tax reform effects, political debate, geopolitical discourse. It appears you either believe the market continues to rise with little giveback in corrective action or you believe the market is going to rollover and not just sell 10%, but at least 20% and more likely a much larger 40%, 50% or more collapse.

Those very large 50%+ selloffs are very rare. Of course after such absurd runs seen since March 2009, very large corrections take on a more normal light. Still, with the economy apparently growing solidly after the prior 9 years of lethargy that had the US at virtually zero growth in summer to fall 2016, it is rare there is a major selloff. Accordingly, from this current rally on SP500, DJ30 and perhaps NASDAQ, you would expect a 10% or so correction. NASDAQ perhaps less given FAANG, while near term extended, is still not that extended from its late October, early November base breakouts.

As for Monday, it was up but it was not blasting higher all over the map. Oh sure, stocks such as NTNX, VCEL, BZUN, AMZN, SIFY, TSLA, CUTR, CAT (quite a mix there -- and we own most of them) jumped upside, but a lot of the action was flattish.

Thus, we were not buying a lot of new positions, though there are positions we like and will buy if they make the moves. We picked up some KSU and some CUTR, banked gain on those mentioned above. Even with SP500, DJ30 extended, we are still looking at good patterns that are NOT extended; they are out there, and as recent leaders of SP500 and DJ30 perhaps test back from their last moves, they could very well receive new money and make the breaks higher. If so, we are there. Why? Because, despite the widespread bullishness and technical extension of some indices, those who say the end has to be nigh are getting louder again. Moreover, there is the economic issue discussed earlier. If the economy is expanding and will continue expanding, the market should price some more of that expansion.

Have a great evening!
Jon Johnson, Chief Market Strategist
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