I know you have heard this before but what a difference a week makes.
Last weekend the market was reeling from the sudden mention of global tariffs on steel and this week the indexes are back at their highs when the tariffs turned out to be mostly a bluff to gain an advantage in the trade negotiations. Do not threaten a trade war against a president that is not afraid of making a populist stand.
The market was worried at first because of the rampant uncertainty but got over it quickly when the actual details were released. Secondly, the "no holds barred" policy on stopping North Korean trade has finally brought Kim Jong Un to the negotiating table with overtures of peace. While we know North Korea will cheat on any agreement, we also know that President Trump will not be shy about calling him out on it. The market liked that as well.
The jobs numbers were more than 50% higher than expectations and wage growth was more than 50% lower. Prosperity is breaking out all over and rising inflation may have been a temporary illusion.
The Q4 earnings cycle is over with 15% earnings growth and now we are looking at 18% earnings growth for the entire year of 2018.
While corrections can happen at any time, it would seem we have a Goldilocks market where everything is just right for the rally to continue.
As you would expect after Friday's blowout short squeeze, the A/D charts are all positive again. The S&P closed at a new high after a month of volatility. The Nasdaq set a new record high but the A/D line failed to reach the prior high despite the strong market. This suggests the actual market breadth on the Nasdaq was not as strong as Friday's 133 point gain would suggest. Advancers did beat decliners 3:1 on the Nasdaq but there were enough laggards to hold the A/D line back.
The Dow, not shown, also failed to make a new high but it was close.
Last week I pointed out that the Semiconductor Index had regained its leadership role over the Nasdaq and that has not changed. The chip index closed at a new high on Friday after falling -13% in the correction. This was an almost miraculous recovery and led the Nasdaq to new highs as well.
The Nasdaq exploded higher on Friday driven mostly by the large caps. The prior uptrend resistance was broken and the index closed 55 points over its prior high. That is a remarkable achievement when the Dow and S&P are still 3% below their prior highs. All of the indicators are firmly bullish and it would take a material event to turn this chart negative again. I am sure there will be some retracements but the overall trend should be higher.
The S&P is not as bullish as the Nasdaq but the chart is still strong. The index needs to push through 2,800 and break that late February resistance high. I am confident that will happen this week. There could be some early week volatility and profit taking but I doubt there will be another big dip.
The Dow chart is actually the weakest. The S&P reached the late February resistance high but the Dow is just barely over the 50-day average and still in congestion. I know it is hard to look at the chart and not think it is bullish after a 440-point gain on Friday but that was just enough to lift it to resistance. The Dow needs to gain another 600 points to push it over that late February resistance. Note that despite the strong move on Friday the indicators are not yet positive.
The Russell should be the next index to make a new high. The small caps are trying to take back control and with the Dow lagging it appears they are succeeding. The Nasdaq is the real leader but much of the Nasdaq is composed of small cap stocks. The Russell is only about 14 points from a new closing high.
The Volatility Index is crashing and that is a clear sign portfolio managers also believe the worst is over and they are no longer buying puts on the SPX.
The only flaw in this bullish scenario is the volume. Friday was a short squeeze not an investor stampede back into the market. Volume was 6.8 billion shares, up only slightly from the 6.4 billion on Thursday. Volume is a weapon of the bulls and that weapon was not being used on Friday.
I am not surprised the volume was low. It was a Friday and there is always weekend event risk. Volume should increase on Monday and hopefully the trend is positive. We do not want volume to increase on a downward move.
Enter passively and exit aggressively!
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