Last week the earnings reports did not seem to be enough to push the market higher but the Thursday night budget vote seemed the get the market’s attention. The thought is that it increases the odds of a tax cut but I am not sure it will be that easy with the fractured Republican majority.
The Dow Industrials led the market higher last week as it was up 2% compared to a 0.86% gain in the S&P 500 and only a 0.35% gain in the Nasdaq Composite. The small cap Russell 2000 was up 0.44%. The weekly NYSE A/D numbers were positive with 1623 stocks advancing with 1433 stocks declining. Surprisingly they were not as strong as the previous week.
The monthly chart of the SPDR Dow Jones Industrial (DIA) closed at $233.13 which was well above the monthly starc+ band for October at $228.57 (point 1). Based on current data the monthly starc+ band for November is at $233.02. The monthly starc- bands have been tested or exceeded several times in the past ten years but moves above the monthly starc+ bands are more rare.
In reviewing the long term chart DIA closed the month of May 2007 at $106.02, point 1, which was above the monthly starc+ band at $104.58. The monthly starc+ band was also exceeded in July 2007 before the market corrected sharply into August.
The monthly starc+ band was also exceeded in May 2013 as the high was $141.32 which was well above the starc+ band at $137.16 (point 2). In 2013 a broad range developed for several months before the SPY surged to the upside at the end of the year.
The monthly Dow Industrials A/D line moved above its WMA in March 2016 9point 4) and it has been strong every since. It is ready to make a convincing new high this month The weekly and daily A/D lines are in strongly positive trends and are clearly bullish.
The weekly chart of the Spyder Trust (SPY) reveals that the close at $257.11 was still below the starc+ band for the week at $257.51 and well above the prior week’s doji high. The starc+ band for next week is at $259.44. This is above the quarterly pivot resistance at $258.61. The widely watched $260 level is 1.1% above Friday’s close. The October monthly starc+ band for SPY is at $258.32.
There is initial support now at $254.35 which was Thursday’s low and then at $253.65 which corresponds to the two week low and the 20 day EMA. The $250-$251 area represents major support. The weekly S&P 500 A/D line came close to its WMA in August but has been rising sharply ever since. The daily A/D line is also still strong as the A/D numbers ended positive on Thursday despite the early selling.
Until Friday there had been some deterioration in the number of NYSE stocks making new highs as it had formed lower highs in October as they peaked at 302 on October 3rd. The downtrend of lower highs, line a, was broken Friday as 256 stocks made new highs.
The number of new lows will often diverge at a market low but instead it peaked at 164 (point b) on August 18th as the NYSE Composite made its low and only 39 stocks made new highs. There has been some gradual increase in the new lows over the past week. A spike in new lows above 70, line c, could be an early warning sign of a correction. There is quarterly pivot resistance for the NYSE Composite at 12,568 which is 1.1% above Friday’s close.
The small cap iShares Russell 2000 (IWM) was lower for most of the week but then gapped higher Friday to close up for the week. The Russell A/D line has moved slightly above its WMA which is a sign that the correction may be over. Another test of the 20 day EMA at $148.18 is possible before IWM tries to test the quarterly pivot resistance at $153.04.
The Powershares QQQ Trust (QQQ) only managed a 0.2% gain for the week and did form a doji. It is not far below the chart resistance in the $149.50-$150 area. The Nasdaq 100 A/D line made a new high Friday and Viper ETF investors who bought in early December of 2016 are doing well.
Both traders and investors are long the Technology Sector Select (XLK) from the September lows and XLK is acting better than QQQ. As I noted in Friday’s column I do think both Amazon.com (AMZN) and Alphabet Inc.(GOOGL) are vulnerable to a decline in reaction to earnings next Thursday. If both were to drop it could trigger a reversal in the tech sector.
What about the week ahead? The sentiment of the financial media is too bullish for my liking as one floor trader commented that the stock market was different this time. Believe me in over 35 years this is never the case and while that does not mean the market cannot still go higher the market is likely to eventually disappoint the majority.
The newsletter sentiment data from Investors Intelligence indicates there are almost four times more bulls than bears which is a historically high level. To break this down 60% are bullish with just 15.2% bearish. In 2014 when the Bull/Bear ratio was also above 4.0 the market paused for a month before it again moved higher.
In contrast the individual investors are not convinced as the bullish % according to AAII dropped 1.8% to 37.9% last week. The bearish % rose 1% to 27.9% with 34.1% neutral on stock prices over the next six months. The fund flow data showed that through October 18th $7.5 billion moved into U.S stock funds which was the largest amount since June. The flows into investment grade bonds are still greater.
As I have said many times the sentiment indicators are only useful in timing when they are in agreement with the technical studies and that is not the case now. They are also more useful at market bottoms than they are at market tops.
The advance/declines lines are currently bullish across all time frames. Even if the S&P 500 were to drop down the 2500-2520 area (2-3%) is unlikely to alter the bullish readings from the weekly or monthly A/D lines. I will be looking for daily sell signals in some of the sector ETFS as a reason to book some nice profits.
This continues to be an environment where new ETF purchases must be done with very close attention to the risk. There are a few ETFS that have been lagging the market all year but their technical studies could complete significant bottoms in the next few weeks. Viper ETF investors and traders are following these ETFs closely.
For stock trader’s earnings season can be a mine field as deciding whether to hold longs or sell in advance of earnings is often a tough call when there are not any strong daily signals. That was the case last week with Netflix as Viper Hot Stocks traders closed out the 50% long position near Monday’s highs for a 22% profit (see chart)
Even though I thought NFLX could hit $206 or $210 I was willing to sell at $202.34 as I felt the risk was too high. As it turned out just minutes after the report was released NFLX hit $210 in after-hours trading but then closed Friday at $194.16. We are watching for a new entry.
It should be an interesting week and if you want to get my current thoughts on the markets I post daily on Twitter.
In my Viper ETF Report and the Viper Hot Stocks Report, I provide market analysis twice a week along with specific buy and sell advice. New subscribers receive five past trading lessons for just $34.95 each per month.