This Artificial Rally Could End Badly for the Bulls

by Sam Collins | October 23, 2013 4:15 am

A weak jobs report resulted in the belief that the Fed would stay with its easy-money policy until well into 2014, and stocks staged a moderate rally yesterday as a result.

The broad-based S&P 500 recorded its fifth consecutive advance, and the Dow Jones Industrial Average finished up 0.49%. The Dow is still 1.3% below its all-time high, but the more volatile indices — Nasdaq and the Russell 2000 (small-caps) — made new highs. Nasdaq made a 13-year high, and Russell made a new all-time high.

The September nonfarm payroll report, delayed by the government’s partial shutdown, showed that 148,000 jobs were added, below the expectation of 180,000.

High volatility and profit-taking dominated the session, with Netflix (NFLX[1]) falling 9.15%, Priceline (PCLN[2]) off 1.05%, Yelp (YELP[3]) down 2.32%, and Facebook (FB[4]) falling 2.18%.

At the close the DJIA had gained 75 points at 15,468, the S&P 500 rose 10 to 1755, and Nasdaq gained 10, closing at 3930. The NYSE traded 753 million shares and Nasdaq crossed 464 million. On the Big Board advancers beat out decliners by 2.7-to-1 and on Nasdaq advancers were ahead by just 1.2-to-1.

1023 djt overbought
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Chart Key

The Dow Jones Transportation Average uncharacteristically blasted through the upper resistance line of a trading channel that has existed since January. The transports are normally viewed as a forecast of economic activity six to nine months in advance. This “breakout,” however, appears to be the result of speculative piling on — an unusual phenomenon.

1023 vix irrational
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The CBOE Market Volatility Index — the “fear index” — has fallen from extreme angst just 10 days ago to a level of contentment that borders on irrational exuberance.

Conclusion: The lower-than-expected jobs numbers has produced a degree of exuberance that yesterday resulted in “key reversal day” signals from several stocks with very high price-to-earnings ratios (see today’s “Trade of the Day[5]”). The reversals are the result of selling by some very savvy investors, including Carl Icahn, who cashed out of half of his position in NFLX.

This cashing out on high volume has thus far been focused on technology stocks that were clearly overpriced. But it is disturbing to have the VIX “fear index” fall in just 10 days from outright terror to complacency. And it is equally disturbing to observe the normally stable Dow Jones Transportation Average rocket through the bullish resistance line of a nine-month channel.

If the chase for stocks were a result of unusually high earnings and revenues, we should be buyers. However, the excitement is the result of an extension of artificial support by a Federal Reserve that apparently has no other plan to stimulate the economy.

In my opinion the evidence is enough to warrant profit-taking on all high-P/E positions and establishing a protective strategy for long-term investments. Short-selling of extended sectors like technology, biotech, etc., should also be part of the trader’s plan. Stocks could still move higher, but reaching for the last dime in the street could also lead to being run over by a bus.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[6].

For a list of this week’s economic reports due out, click here[7].

  1. NFLX:
  2. PCLN:
  3. YELP:
  4. FB:
  5. Trade of the Day:
  6. click here:
  7. click here:

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