There is no middle ground. The market alternates between corrections and rallies.
Just a week ago, the market outlook was grim. The major indexes were testing the correction lows after two weeks of declines. Suddenly a headline appeared to reverse sentiment and the market charged higher. The Dow is up more than 1,300 points from the low the prior Thursday. That is more than it lost over the prior 2.5 weeks. The pendulum swung back in our favor.
The problem with pendulums is that the continue swinging. There is no neutral territory. We are either moving higher or lower and sometimes there is no real reasoning behind the moves.
Last week Warren Buffet gave the pendulum a swift kick with his purchase of Apple shares and the news he had been buying other stocks all throughout the quarter. The Oracle of Omaha was credited with turning the market around. Unfortunately, news headlines are fleeting and there will be another set next week to either continue the upward push or knock it back down again.
I was shocked after the strong rebound on Thursday and gains the next three days that sentiment was not stronger when the survey closed on Wednesday. I suspect investors were still gun shy after the 2+ weeks of declines. Next Wednesday's survey should show a huge gain if the markets remain positive.
The improvement in the A/D line on the S&P should have given sentiment a boost. This is a new high for this cycle. On Thursday, there were 425 advancers and only 73 decliners. Friday's profit taking weakened that to 300/197 but still positive.
The Bullish percent Index also recovered somewhat to 54.4%, which means 54% of the S&P stocks now have a buy signal.
The percentage of stocks over their 50-day average rose to 62% and a three-month high. The percentage over the longer 200-day average rose to an identical 62.2% but has a lot farther to go to return to a "normal" reading.
All of the indicators have turned positive on the S&P and the 50-day average has started to turn up again. It is only barely noticeable but it is veering away from a death cross of the 50 below the 200. For a while, there it looked like we could be heading in that direction. The S&P has resistance at 2750, 2790, 2800 and 2810. The bearish descending triangle is in the process of being broken but until the S&P trades over 2,800 we are still at lower highs.
The Dow is trying to move higher but closed just under the 100-day average. This was strong resistance in April and could be strong again. This is odd since the Dow rarely respects averages because its slim 30 stock composition means just one or two stocks and cause big moves on any given day to push through averages.
The FANG stocks are all moving in the same direction after a long period of divergence but they are not yet back in sync. Google is the trailing stock with Facebook almost back in parity with Amazon and Netflix. We need all of these stocks to move together if the rally is going to continue.
The Nasdaq and the chip sector are almost back in sync after the chips crashed three weeks ago. The hiccup on the far right was the Nvidia post earnings decline. Given their earnings beat, they should remain positive in the weeks ahead and that will allow the sector to continue healing. Chips normally lead the Nasdaq but in this case Apple lifted the Nasdaq out of the chipwreck.
The Nasdaq has rebounded nearly 6% over the last 7 days. That has gone from oversold to overbought in a very short period of time. There is major resistance at 7,421 but then clear sailing to the old resistance highs.
The Russell 200 is the leader and closed only 4 points below a new high. A breakout on the Russell should lead to a breakout on the Nasdaq and they could drag the big cap indexes higher.
The charts are bullish this weekend but remember the pendulum theory. The next three months are typically choppy with a tendency to trend lower. Do not get married to any new positions. Hold them until the trend changes. Sell in May and go away has not appeared yet but there are three weeks left in May. Just be aware of the market and the reaction to headlines. The next month is likely to be packed full of political headlines before summer vacations begin.
Enter passively and exit aggressively!
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