Market’s Snail-Paced Advance Should Continue

Despite the pattern of new highs in the S&P 500, relative strength is only slightly overbought

By Sam Collins, InvestorPlace Chief Technical Analyst

Wednesday ended on a mixed close following a positive opening. General Electric (NYSE:GE) pushed the S&P 500 to a multi-year high and was the best performer of the Dow stocks, up 3.6%. The gain came as a result of an agreement to sell Comcast (NASDAQ:CMCSA) the remainder of its holdings in NBCUniversal.

But the Dow was negatively impacted by a drop of 1.2% in McDonald’s (NYSE:MCD). Other fast-food stocks also fell following President Obama’s proposal to increase the federal minimum wage.

At Wednesday’s close, the Dow Jones Industrial Average was off 36 points to 13,983, the S&P 500 rose a point to 1,520, and the Nasdaq gained 10 points at 3,197. The NYSE continued its string of low-volume days trading 656 million shares, and the Nasdaq crossed 417 million. Advancers were ahead of decliners on the Big Board by 1.5-to-1 and on the Nasdaq by 1.2-to-1.

VIX Chart
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The CBOE Volatility Index (VIX) sank again to the lowest complacency numbers seen in years. The lowest number was recorded on Jan. 18 at 12.29. It moved up to above 14 last week, but sank again as the major indices slowly ground out new highs.

The index is telling us that fear of a sell-off is very low, but floor traders report that higher numbers are accompanying July to September VIX futures. That is a more normal pattern since market corrections often occur in late summer.

SPX Chart
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Trade of the Day Chart Key

The S&P 500 continues to peck away at new five-year highs as it tracks the bullish resistance line of a sharply angled bull channel. First support is at the 20-day moving average just above 1,500. The major support remains at the old breakout line of 1,475.

Despite the pattern of new highs, relative strength is only slightly overbought, which usually means that the snail-paced advance will continue.

Conclusion: The path of least resistance is up, and even though worry among the public is high, the VIX doesn’t show much fear among traders.

Another positive is “sector rotation.” This occurs when one group of stocks becomes slightly overbought and institutional buyers head for bargains in other areas rather than going to cash.

This week, we have observed renewed interest in the financial stocks and especially the banks. This follows a period in which the energy stocks popped, and then industrial stocks were strong. And before that retail stocks were in the limelight. As long as this pattern continues, the major indices should continue to make new highs.

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.

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