For the past three weeks, our models have been defensive regarding the stock market after the first week’s post-election surge. I often say that when certain conditions are present, a “window of opportunity” opens for a stock market decline. The longer time passes without a decline, the more likely the window will close. Today, the window is starting to close and I imagine that by two weeks from today, it will be fully closed, modest decline or not.
The Dow, S&P 500, S&P 400 and Russell 2000 are all in gear to the upside and look strong, although definitely overbought. The NASDAQ 100, on the other hand, has given back all of its post-election hoopla and just doesn’t behave well. While that bellwether index is dominated by Apple, Amazon, Facebook, Microsoft and Google, which have been under strong downside pressure, it would be careless to dismiss this as just a few bad apples (no pun intended). It remains a red flag for now.
Looking at my four key sectors, banks, discretionary and transports are all acting very well and indicating good things for the bull market. Only semiconductors are questionable, however, they really haven’t done anything terribly wrong except see an outsized down day last Thursday. Further supporting excellent leadership is the performance of the materials, industrials and energy. With the defensive staples, utilities and REITs continuing to lag the rally, that adds further credence to the longevity of the bull market. I do think, however, that a short-term trading opportunity may exist as the Fed raises rates next Wednesday and the most beaten down sectors begin to rally on that news.
High yield bonds are finally starting to kick it into high gear after breaking out to the upside on Tuesday. Even the NYSE Advance/Decline Line is ever so slowly inching back toward an all-time high. Unless something dramatically changes over the coming week, weakness is a must buy into January.
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