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Fight the Tape and the Fed at Your Own Peril

With the traditionally strongest six months ahead of us, we should follow institutional traders' lead


The Dow Jones Industrial Average closed at a record high Tuesday. Strong earnings from various sectors pushed the industrials, as well as the S&P 500, to new highs. The Nasdaq was slowed by a computer malfunction, but the index closed up 0.3%.

IBM (IBM) bolstered the technology sector with a 2.7% advance following an announcement that it would buy back an additional $15 billion in shares. Pfizer (PFE) rose 1.7% on better-than-expected earnings. But despite beating earnings estimates, Apple’s (AAPL) gross margin guidance was lacking, and the stock fell 2.5%.

At Tuesday’s close, the Dow gained 111 points to 15,680, the S&P 500 rose 10 points to 1772, and the Nasdaq gained 12 points at 3,952. The NYSE traded 682 million shares and the Nasdaq crossed 470 million. Advancers were ahead of decliners on both exchanges by about 1.5-to-1.

Dow Chart
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Chart Key

With its new closing high, the senior index is within 30 points of a new all-time high and a fresh Dow Theory buy signal. The high for the day at 15,683 did not exceed the September high of 15,709, but the strong close is almost an assurance that the barrier will finally be broken.

DJT Chart
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Meanwhile, the Dow transports went on to set another new closing high. The break through the top of a well-established bull channel is strong evidence that the trend in the transports will continue. Pullbacks will probably be held at the breakout line at 6,866, and corrections should hold at the 50-day moving average at 6,600.

Conclusion: With the traditionally strongest six months ahead of us, much depends upon Fed policy. But today’s meeting will probably shed little light on the future course, since it is the last meeting of the year and a new Fed chairman will take over in January (assuming the nomination doesn’t get bogged down in Congress).

On a day that the Dow industrials closed at a record high, traditionalists will be disappointed that volume and market breadth are not stronger. But the market has lacked both of these characteristics for more than a year. As noted before, the public is still in a state of disbelief, and thus failing to participate in either the buy or sell side of the market.

Nevertheless, margin levels are at very high levels as institutional traders maximize their gains. They have learned not to fight the tape or the Fed, and it appears that this trend will continue through the new year.

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,

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