Too Many Mixed Signals to Go Chasing Stocks

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The Dow Jones Industrial Average led a broad-based market rally on Monday. The triple-digit jump was partially triggered by M&A activity in the health care sector. UnitedHealth Group Inc. (NYSE:UNH) announced it will acquire Catamaran Corp (USA) (NASDAQ:CTRX) for about $2.8 billion in cash. And Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) agreed to buy Auspex Pharmaceuticals Inc (NASDAQ:ASPX) in a $3.2 billion cash deal.

But the major reason for the jump in stock prices was easier money in China for housing and a dovish comment by Federal Reserve Chair Janet Yellen.

Even though the rally was broad based, volume was relatively light while last week’s volume tended to be higher and on the selling side. But it is normal for volume to contract during a holiday week, and the market will be closed for Good Friday.

Last week’s decline was partially attributed to earnings concerns. According to FacSet, Q1 earnings are expected to decline 4.7% year over year. Q2 and Q3 profits are also feared to miss the mark. However, money manager Andrew Slimmon of Morgan Stanley Wealth Management told The Wall Street Journal that lowered expectations were “actually a good thing.”

U.S. consumer spending rose 0.1% for February while analysts had expected 0.2%.

Gold futures lost 1.5% at $1,184.80 an ounce. And West Texas Intermediate (WTI) for May delivery fell 0.4% to $48.68 a barrel on fears of an industry oversupply. The U.S. dollar rose against the euro, which fell to $1.08.

At Monday’s close, the Dow Jones Industrial Average gained 264 points at 17,976, the S&P 500 rose 25 points to 2,086, the Nasdaq popped 56 points to 4,947, and the Russell 2000 jumped 17 points to 1,258.

The NYSE’s primary market crossed 676 million shares with total volume of 2.9 billion while the Nasdaq crossed 1.8 billion shares. On the Big Board, advancers outpaced decliners by 2.9-to-1, and on the Nasdaq, advancers led by 2-to-1.

Dow Jones Industrial Average Chart
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Chart Key

Despite last week’s scary moments, the Dow Jones Industrial Average held its March low and rallied from it, closing above its 50-day and 20-day moving averages.

In the process, it formed a double-top and double-bottom, and the pattern now resembles a bullish channel down. This formation usually breaks to the upside.

Meanwhile, another fairly bullish event occurred — the upturn of MACD. Admittedly, this is fairly subtle technical analysis, but textbook, nevertheless.

Dow Jones Transportation Average Chart
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The chart of the Dow Jones Transportation Average, however, does not have many bullish characteristics. A quadruple-top marks the major formation with triple sell signals from my proprietary indicator, the Collins-Bollinger Reversal (CBR).

The best thing that can be said is that the index reversed from its 200-day moving average. The midpoint of the overall formation is at the 50-day moving average at 8,960. MACD is in the bear zone.

Conclusion

Dow Theory, which I’ve discussed ad nauseam in the Daily Market Outlook, has not confirmed that a bull market is still intact. Despite that, our S&P 500 17-month moving average chart is bullish, as are a number of other indicators.

The reason for the failure of the Dow Jones Transportation Average to confirm could be its overwhelming dependence on global trade since there is a big negative impact from the strongest U.S. dollar in a decade.

Therefore, if you must trade, go for small and mid caps. But chasing Monday’s explosive rally may not be savvy. Even long-term investors would be smart to avoid the current high prices of the technology group and focus on the emerging housing sector (see my Trade of the Day) and other lower P/E bargains.

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/2015/03/daily-market-outlook-too-many-mixed-signals-to-chase-stocks/.

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