Stocks were mixed again on Thursday and Friday of last week as we see some sector rotation taking place after the election. The Dow gained 219 on Thursday and added 40 on Friday. The Nasdaq 100 has been the one that has been sold as we see more going into financials and small caps. On Thursday the Naz 100 lost 1.6% and was flat on Friday.
These share prices are for Thursday and do not reflect the action on Friday because of Veteran's Day. Monday's share prices will include Friday's movement.
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Investors were very nervous about a Trump victory so when he won, there were a lot of underinvested people out there who were scrambling to get back in. As we know how the market goes, if you are not in stocks and become impatient and chase, the market will probably pull back and make you regret it. If you choose patience the market may continue up without you. It tends to do what the majority of investors least anticipate. The more people that are waiting for a pullback, the more likely that they won't see one - or at least the pullbacks will be minor. The more people that have chased, the more likely that this rally will fade. It's just the way it seems to work.
The action thus far has been very similar to what happened after the surprise result of the Brexit vote in that stocks initially sold off hard, but quickly rebounded. The difference with the post presidential election reaction was that all of the selling was done in the overnight futures markets and the rebound started before the stock market even opened on Wednesday morning.
The futures are popping again on Sunday night with 0.30% to 0.50% gains already. And gold is down sharply again. Right now an ounce of gold is $136 below the Election night highs.
The SPY (S&P 500 / C-Fund) tested the all-time highs on Thursday and may be facing a double top here because it has since pulled back some and we could see a little more profit taking from here, that is unless too many people are waiting for a pullback. Double top pullbacks can be quick, or severe, but there is usually some slowing down. The action after the Brexit vote was similar and the current minor pullback looks like what happened a few days after the initial Brexit rally (see blue box in early July) where the 50-dau EMA was tested again.
The weekly chart of the S&P 500 shows that we finally saw a breakout of the large bull flag that has taken 5-months to form. The 50-week EMA was only broken briefly and the S&P has already recovered.
The monthly chart, where every bar represents one month, created a positive outside reversal bar meaning the low was lower than the October low, and the high is now higher than the October high. It's not all that common and often signals a nice move coming in the direction of where it closes, so it must close above the October high by the end of this month to be an official positive reversal. If it ends up closing below October's low for some reason, it could mean a market top is forming, but that is the least likely outcome at this point.
The DWCPF (S-fund) has been on fire lately gaining 5.4% last week while the Russell 2000 gained over 10%. The biggest moves come at what feel like the worst of times because most are investors are leaning heavily the wrong way. That's what we saw before the election. Small caps were lagging and the charts were breaking down so investors were fleeing. The more volatile stocks are hit the hardest when stocks are falling so when things turned around, they had the most to gain.
The QQQ, or Nasdaq 100 which are the largest of the technology sector stocks, has not been all that impressive. In fact they are down since the market closed on Election Day. The FBI triggered open gap from November 7th was filled, where none of the other indices really came close (except if you include the action of the futures market on Election night when they all were filled.)
The Dow Transportation Index has been the canary in the coal mine for the bullish argument as it held up well before the election, and the large bullish inverted head and shoulders and cup and handle patterns broke out to the upside with authority. Often these breakout will come back to test the breakout levels so here's one of those cases where chasing probably wouldn't work.
The EFA (I-fund) had been lagging with some of that having to do with the recent strength in the dollar, but overall this chart needs to see a pop or else it looks like a big topping pattern. Something is not right here.
The price of oil has also been impacted by the strength in the dollar, but lower oil process are also a red flag for the economy. It may just be that it is remaining in the $40 - $50 range we have been watching for months. The head and shoulders pattern would give us a downside target near $38, which would be near the bottom of the range. Any lower and the stock market will likely get finicky again because it could mean economic weakness.
The AGG (Bonds / F-fund) has been getting hit hard as the dollar strengthens and we get closer to the Fed's December FOMC meeting. Investors are opting for stocks during this strong rally, but eventually when profit taking kicks in in the stock market, the higher yields may start to look attractive and we could get a short-term relief rally in bonds. That's a big gap that needs filling up near 110.80.
Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: [url]www.tsptalk.com/plus.php
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Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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