Take a Bullish but Cautious Approach

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The Dow and S&P 500 both made new record closing highs on Monday. The reason, according to floor brokers, was the continued positive impact of the Federal Reserve’s patience regarding an interest rate hike.

Volume was low, especially when compared to the huge volume on Friday, which was due to quadruple witching day. Low volume often exaggerates stock moves during holiday weeks. U.S. stock markets will close early on Wednesday and will be closed on Christmas.

Blue chips that had been beaten down in the past two weeks rebounded Monday. Intel Corporation (INTC) rose 2.3% and International Business Machines Corp. (IBM) gained 1.9%. Both stocks are institutional favorites.

Biotech stocks were hit hard largely as a result of a 14.3% plunge in Gilead Sciences, Inc. (GILD). This came on a potential market share threat to its hugely successful — and expensive — hepatitis C treatment. Express Scripts Holding Company (ESRX) said it would sell a new treatment by AbbVie Inc (ABBV) that is significantly cheaper.

Traders sold commodities. Crude oil fell again, down 3.3% at $55.26 a barrel. Natural gas dropped 8.2% to $3.18 per btu. Gold futures fell 1.4% to $1,179.70 an ounce.

Existing home sales for November declined 6.1% to an annualized rate of 4.93 million units where 5.2 million units were expected.

At Monday’s close, the Dow Jones Industrial Average rose 155 points to 17,959, the S&P 500 gained 8 points at 2,079, the Nasdaq was up 16 points at 4,781, and the Russell 2000 added 6 points at 1,202.

The NYSE’s primary market traded 790 million shares with total volume of 3.3 billion shares. The Nasdaq crossed 1.7 billion shares. On both major exchanges, advancers outpaced decliners by about 1.5-to-1.

Despite the positive predictions regarding next year’s economic results, the index that is most often cited as the measure of future economic success has failed to break out.

DJT Chart
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Chart Key

The Dow Jones Transportation Average broke from a channel down that began with the November high; however, it has not yet broken the important resistance line at 9,120 and is far from its closing high at 9,202.

MACD is arching up but has lagged the other indices. Support is first at the 20-day moving average at 9,012, and then the 50-day moving average at 8,809.

NYSE Composite Chart
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The other index that currently lags is the NYSE Composite. This index is composed of all stocks on the NYSE. With the focus on blue chips Monday, I would have expected a better performance. It did, however, flash a MACD buy signal, which is no small thing. Resistance at 11,068 overhangs the progress of the past five days, and until it is breached, it remains a problem.

Conclusion

Holiday weeks often present traders with opportunity due to low volume and high volatility. Both the Russell 2000 and Nasdaq look capable of breaking to new highs. Yet, the institutional emphasis appears to be on the blue chips, i.e., the “generals.” But generals don’t usually lead effective attacks. And the “soldiers,” or mid- and small-cap stocks, continue to struggle with resistance.

I suggest, therefore, that traders take a cautious approach and use stop-loss orders to protect positions. I need not tell our readers that stocks don’t advance forever, and last week’s pop still looks more like short-covering along with institutional chasing of their favorites.

Be bullish but cautious since volatility can turn a profit into a loss in a blink.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2014/12/daily-market-outlook-take-bullish-cautious-approach/.

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