The stock market advanced crisply on Thursday as most investors found higher prices under the tree on the day after Christmas. The Dow Jones Industrials rocked 0.7% higher, while the more broadly-based S&P 500, Nasdaq and Russell 2000 performed only half as well or less, at gains of 0.5%, 0.3% and 0.1%, respectively.
If the advance is indeed narrowing down to a handful of very large companies to make the headlines seem brighter than the reality of the entire market, it’s a stock market development we will have to monitor very closely.
You can certainly make good money trading a narrow market focused on extra-large companies like 3M (MMM), ExxonMobil (XOM) and General Electric (GE) — but these are markets that tend to become unstable fairly quickly. An example would be a spinning top: At the moment of its maximum spin, it is upright, but as soon as it begins to lose velocity, the lower part of the top begins to bend out of shape until only the top is off the ground, and then ultimately that falls too.
I don’t want to sound too negative at such a joyous time amid one of the strongest phases of the bull market that we have seen this year, but I feel obligated to warn you when too much of a good thing starts to push the stock market closer to peril. You know that one or two slices of pie after Christmas dinner are great, but if you eat the whole thing and wash it down with rum-laced eggnog, you are going to have to lay down for a spell and sleep it off.
Based on historical averages, cycle work and intuition, the time for the cycle to turn would be around the start of next week, which happens to coincide with the new year. It is not uncommon for major switches in stock market direction and enthusiasm to occur with the beginning of a new year, as investors put a ribbon on their returns for one year and begin a new campaign on Jan. 2.
You may recall that last year the market fell hard following the reelection of the president, and then rebounded a bit in early to mid-December, though that comeback was nothing special. It was only once 2013 dawned on Jan. 2 that the latest phase of the bull market kicked into high gear with a gap up — and then it was off to the races.
We probably will not see the reverse come next week, but cycle work suggests that the big football bowl games could usher in a stretch of flat returns as investors take a wait-and-see approach to the start of Q4 earnings reporting season, which will kick off in the second week of the year.
While I always remain active because I initiate positions on both the long and the short side —by buying and selling stocks, as well as trading bullish and bearish options — my advice for you is to simply enjoy the profits I hope you made based on my Northrop Grumman (NOC) Trade of the Day in the NOC Jan 110 Calls, which hit my $6.10 target on Thursday. I’ll have new active recommendations next week.
Jon Markman operates the investment firm Markman Capital Insights. He also writes a daily trading newsletter, Trader’s Advantage, and CounterPoint Options, a service geared towards helping individual traders make steady, consistent profits with volatility-related instruments.
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