Stocks went from being overbought, to being very over-bought in a matter of a few weeks. The fact that the market refuses to fall in a meaningful fashion clearly shows you how strong the bulls are right now. Stepping back, it is important to keep a cool head and remain cognizant of the fact that the market is very over-bought and due to pullback. Buying up here, after a big move, is not prudent and it is a matter of when, not if, the market pulls back. The first important level to watch is the 50 day moving average for the major indices. The one negative divergence that showed up on my radar last week was that the semiconductor stocks (SMH) fell while the broader markets rallied. Semis tend to be a leading group, so I will continue to watch them closely. Outside of that, the market remains very strong as we head into earnings season. Remember, in bull markets, surprises happen to the upside, not the downside.
On Monday, stocks ended mixed to slightly lower as the market paused to digest the Dow’s strongest start to a new year since 2006. Right out of the gate in 2018, the major indices hit fresh record highs and also broke above key milestones. The Dow, S&P 500 and Nasdaq closed above 25,000, 2,700 and 7,000, respectively. On Tuesday, stocks rallied sharply helping the benchmark S&P 500 to enjoy the best start to a year since 1987.
On Wednesday, sellers showed up in the morning but the bulls quickly stepped in and aggressively bought stocks. At one point the Dow fell about 100 points but rallied back and ended slightly lower by the close. The fact that the market refuses to pullback, even from very over-bought levels, tells you everything you need to know about the market right now. This type of very strong action tends to occur near a market top, not near a bottom. So just keep that in the back of your mind as this very strong bull market ages.
Thur & Fri Action:
Stocks rallied nicely on Thursday after Delta Air Lines (DAL) and KB Home (KBH) both rallied after reporting stronger-than-expected quarterly profits. Stocks rallied on Friday after several of the big banks reported earnings, and most rallied on the news. Overall, earnings are expected to have grown by 10.6% during the fourth quarter, according to S&P Capital IQ. Remember, from my point of view, the most important factor to look at during earnings season is how the market and individual stock react to their earnings.
Market Outlook: Bulls Are Strong
The bulls are back in control and the market remains very strong.
As always, keep your losses small and never argue with the tape.