Nuclear Tensions Send Stocks Lower: From Overbought Conditions

Adam Sarhan |

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The market fell from extremely overbought levels last week as tensions rose between the U.S. and North Korea. The major indices were extended to the upside and way overdue to pullback. The S&P 500 and Nasdaq pulled back into their respective 50 DMA lines while the Dow Jones Industrial Average is still above it. Meanwhile, the small-cap Russell 2000 and the Dow Jones Transportation Index are weaker on a relative basis and are both pulling back into their longer-term 200 DMA lines. Separately, the VIX soared last week from very low levels. The key going forward is to analyze the health of this pullback to see if it is another buying opportunity or the start of something more severe.

Mon-Wed Action:

On Monday, the Dow enjoyed its 9th straight record close as investors continued to digest a slew of earnings. So far, earnings have grown +10.1%, according to data from FactSet. That is stronger than the initial estimate of +6.2% growth. Stocks fell on Tuesday after President Donald Trump warned North Korea about facing "fire and fury" if they continued to threaten the United States. Stocks ended a little lower on Wednesday after North Korea responded by saying it was "carefully examining" the idea of a missile strike on Guam, a U.S. Pacific territory.

Thur & Fri Action:

Stocks fell hard on Thursday, as geopolitical tensions remained elevated and the the VIX spiked. The CBOE Volatility Index (VIX), is also known as the best gauge of fear in the market, jumped to its highest level since June. Stocks were quiet on Friday after inflation came in less than expected. The Consumer Price Index, which measures consumer prices, only rose by +0.1% last month, missing estimates for a gain of +0.2%.

Market Outlook: Earnings Remain Front and Center

The Dow briefly broke above 22k then fell below it as it begins to pullback to digest a very strong rally. The bulls showed up and defended important support in June which is very bullish for the market. As we have said several times over the past month, as long as support holds, the bulls remain in control of this market.

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