General Market Outlook: Last week the market continued to move higher despite continued negative news out of Europe. The S&P 500 rose 0.9%, the Nasdaq rose 1.4% the Dow rose 0.5%. There appears to be a change in tone, the last two weeks the market has been to be able to shrug off bad news and move higher. It appears that signs of institutional selling have abated and there appears to be more institutional appetite for stocks. Still one should remain vigilant since last Friday we saw a 0.5% loss on the S&P 500 which came in on higher volume than the day before, thus adding another distribution day. Despite Friday’s negative close, once again we saw the market was able to come off the lows and move higher coming into the close.
The technical view: January is always a tricky month for the market, so we try not to make too much out of what has happened so far. However, one cannot ignore the generally positive action in stocks for the last 2 weeks. In the 9 trading sessions we had so far this year the market opened lower on 6 occasions and was able to close higher for the day, rallying into the close (see chart below). Also we observe that the Nasdaq has held up well above its 200 day moving average, something with which it struggled last quarter. The S&P 500 is holding well above its 10 day moving average, and still trying to take out its October 27th high of 1292. The Dow Jones Industrial is also holding above its 10 day moving average.
Adding also to the positive tone is the action in leading stocks, a few breakouts are holding and stocks are moving into higher ground. Last 2 quarters we would see breakouts in quality stocks only to see them fail and fall back into their consolidation. While this still has not given us a raging bull market, the action is improving and we are seeing new highs in quality stocks, in the retail, medical, energy, banks and technology.
Fundamental view: While we keep getting mixed economic numbers, generally speaking economic numbers are improving more than the pessimist care to admit. In this environment it is easy to be cynical and negative. Politically speaking the Democrats keep telling us how bad it is so they can ask for more money to spend, Republicans keep telling us how bad it is so they can boot Obama out of the White House. Really – we just need to get Washington out of the way. So all this political posturing and headlines from Europe can cloud one’s mind, but one way to get a real picture of what is going on is to take a look what is really going on in the market and if there is a theme building underneath the surface.
I do believe a theme can be uncovered by looking at the performance of Industry groups in IBD’s 197 Industry group rankings. Groups that have climbed into top spots quickly over the last few months include Retail-Wholesale Building Products, Building Construction Products, Building Wood Products, Regional Banks, and Building-Residential/Commercial. The movement of these groups tells us that the economy is recovering and this should do well for the general market. Furthermore, we are seeing leadership in many groups of healthcare, retail, oil & gas, and some technology.
Since our follow-through day of December 20th, the continued uptrend of this market, and evidence that some new highs are being made, at this point we are willing to commit more money to certain stocks. Although we are willing to commit more money to stocks, we will continue to monitor for any evidence of increased institutional selling and adjust accordingly.
Earnings started last week, so we will watch how the market reacts to the numbers. Please contact us at 1-866-903-1822 for help on this matter.