It may not feel like a bull market because of the slow pace of trading, but the broad indices closed higher for the third straight day. And if stocks close flat or higher today, it will be the sixth straight week of gains.
Thursday’s rise was attributed to improvement in the U.S. labor market as unemployment claims fell more than expected last week. An additional boost came from what appears to be a confirmed deal between Greek leaders on austerity measures needed to secure a bailout from the EU.
At the close the DJIA gained 7 points to end at 12,890, the S&P 500 gained 2 points, closing at 1,352, and Nasdaq rose 11 to 2,927. The NYSE traded 759 million shares, and Nasdaq crossed 534 million. Advancers and decliners were even on the Big Board, and decliners were ahead by 1.2-to-1 on Nasdaq.
Click to EnlargeOne analyst said today, “Nasdaq is proving that an overbought market can become more overbought.” The last time the index scored a relative strength indicator (RSI) at 80+ was in November 2010, just before the Naz took a fall from 2,562 to 2,470. Before that it was the April 2010 reading at 81.45, one week ahead of the big drop from 2,530 to 2,186 in about 10 sessions.
The first line of support for Nasdaq is the top of the recent gap at 2,885 and then farther down the price chain at the January high of 2,834. However, the first upside target is the December 2000 top at 3,028.
Both the Dow Jones Industrials and the S&P 500 have had impressive drives to new highs as well. But their internal indicators are not nearly so overbought as Nasdaq’s. As for upside targets: The Dow’s initial target is the May 2008 high of 13,136, while support now rests near the July high of 12,750. The 500’s first important resistance is the July high of 1,356, and support is at 1,330 to 1,335.
Our internal indicators are all overbought, and the important AAII Sentiment Survey reported that bullish enthusiasm has jumped to 51.6 up from 43.81 last week and 38.57 on Dec. 8.
Click to EnlargeEarly last week I noted that in order to keep the rally going, the technology sector would have to be joined by the financial sector. That’s exactly what happened and is best illustrated by the gap up on the Financial Select Sector SPDR ETF (NYSE:XLF) along with its clear break from the 200-day moving average. But the advance on declining volume with an overbought stochastic is not favorable.
This doesn’t necessarily mean the run is over, but as it approaches the resistance zone formed from May to August of last year, it’s likely to slow down the pace of the advance.
Clearly, many institutions but few of the public are enthused over the current value of stocks. That’s why trading volume remains low — very limited public participation. But the Fed, through its bond- and mortgage-buying operations, is keeping the institutions in the game. Despite the overbought charts and internal and sentiment numbers at very high levels, the buying could continue . But the air is getting thin.
Dorsey Wright Associates warned its clients that a correction is likely because it has noted that 72% of stocks in its universe are “overbought.” Be careful out there.
