Morning Market Thoughts
Good morning. Futures are pointing to a slightly lower open, which shouldn’t be surprising after the S&P has closed higher in 9 of the last 10 trading days. Pretty remarkable, isn’t it. Oh, it gets better. Over the last 8 days, the S&P has printed consecutive higher lows. Each intraday pullback was met with buyers who were a bit more aggressive about putting their money to work than the day before. And on 7 of the last 8 days, the intraday highs have eclipsed the prior high, with the one exception being a decline of 0.15 points — basically a wash.Trading volume has generally been a bit lower than the average volume over the last 50 days. But the last two days of advances have occurred on slightly higher than average volume.
Putting this all together, we can see a picture of a bullish tone among institutions who are still wanting to get into the market, even at levels that are nearly 6% up over the last 7-1/2 weeks. The result is a steepening slope of the trend, which will ultimately be followed by a correction as the buyers finish their work. The challenge is in predicting the top of this move. No one can do it. We just don’t know.
But here is one way to at least identify a decrease in institutional buying. Given the numbers I’ve just described, then be on the alert for a red day where the S&P opens high, but then closes noticeably lower…and has an intraday low that is lower than the preceding day. It would be an even more powerful signal if the intraday high failed to eclipse the prior intraday high. What I’m describing is a bearish reversal pattern. If it occurs on higher-than-average volume, the signal is even more powerful.
But here’s a twist: This type of event does not necessarily precede a correction. It might just be the first sign of a sideways move in the market where traders rest and allow the market to “catch up”. When traders get too enthusiastic, they push prices high in rapid fashion. When they finally realize that they might be a bit too eager, they withdraw their bids and decide to wait for prices to come in. They don’t necessarily sell. They just stop buying.
Look at December 14th. The S&P closed down .81% from the prior close. The S&P printed a lower high, and lower low. Just what I’m describing above. Then, over the next 11 days, the S&P fell another 0.88%…before starting the next move that took us 5.5% higher. So, after a reversal signal, the pullback was less than 2% — not exactly a “correction” or a “sell-off”.
So don’t let your emotions overrule your eyes. Stay objective and recognize that institutions want to own more stock. They need to put money to work. Also, I suspect that the public is starting to put more money in their investment accounts as they continue to read headlines about the market being up 10% since the election. Even socialists like to make money, and missing out on 10% is painful. So the money inflows to investment firms give them more money to invest. They don’t hold cash; they have to buy stocks.
So enjoy this rally as long as it lasts. Embrace the fact that you will not be able to predict the top, though you should be able to see it earlier than most. I’ll be keeping you on track. That’s my job.
Have a great day, and hope to see you in today’s training session at noon ET, and 9 am PT.
–Dan
Market Update