Don’t Buy Into the ‘Market Bubble’ Talk

For seven weeks, stocks have risen on slightly increased volume and gradually increasing breadth

By Sam Collins, InvestorPlace Chief Technical Analyst

Stocks forged ahead again on Friday as the S&P 500 closed above 1,800, extending its gains for the seventh week. And despite talk of market bubbles, the Dow Jones Industrial Average also set a new record last week by closing above 16,000.

Even the Nasdaq scored a gain for the week, despite last weekend’s attack in Barron’s on high-beta momentum stocks. Optimism overcame fear as the index not only recovered from a loss early in the week, but set a new intraday high on Monday, and then overcame a round of profit-taking.

Optimism resulted from what appears to be the certain approval of Janet Yellen as the new Federal Reserve chairwoman, and thus, a continuation of easy money policies. And economic reports at midweek showed no indication of the beginnings of inflation, giving the Fed no reason to begin to taper its bond purchases.

At Friday’s close, the Dow Jones Industrial Average gained 55 points at 16,065, the S&P 500 rose 9 points to 1,805, and the Nasdaq jumped 22 points 3,992. The NYSE primary market traded 607 million shares with total volume of 3 billion shares. The Nasdaq traded a total volume of 1.7 billion shares. Advancers exceeded decliners on both exchanges by about 1.6-to-1.

For the week, the Dow rose 0.7%, the S&P 500 gained 0.4%, and the Nasdaq was up 0.1%.

Nasdaq Chart
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Chart Key

Last week’s focus was on the Dow industrials and the S&P 500. But the mid- and small caps had a banner week as well. The Nasdaq is less than 4 points from a new high, and its MACD internal indicator is very close to a new buy signal. Immediate support is at the 20-day moving average at 3,939 and then the 50-day at 3,860.

Russell Chart
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The Russell 2000 small-cap index broke to a new intraday and closing high on Friday. This was accompanied by a fresh MACD buy signal. The index’s very steady advance has been confirmed, and a new short-term target of 1,145 is set.

Conclusion: Despite cries of “overbought,” “correction due,” and of course, the ultimate acid producer, “markets are in a bubble,” for seven weeks stocks have risen on slightly increased volume and gradually increasing breadth. 

Some analysts have said that the public is finally getting involved, and therefore, smart investors should take profits before year-end. However, there is scant evidence to support that point, and volume, though up slightly, is nothing compared to the high-volume numbers of just a few years ago when the NYSE primary market was averaging about 15 million shares a day. 

Last week’s sentiment numbers from the Association of Individual Investors (AAII) show a steady drop in the public’s bullishness. The number of investors surveyed that expect stock prices will rise over the next six months fell from 49.2% on Oct. 24 to 34.4% on Nov. 21. As might be expected, during the same time frame, bearish sentiment increased from 17.6% to 29.5%. Since the public is usually wrong, these reports are bullish for stocks.

In the Wall Street Journal Weekend, Mark Hulbert acknowledged the seasonal pattern of large-cap stocks (market capitalization of at least $50 billion) leading the market until Dec. 31. And he referred to the more widely known pattern of the smallest companies performing well at the beginning of the year, which is known as the “January Effect.”

My analysis also indicates that there are more new highs to be made in December. So stay long but protect your positions with trailing stops, and only buy stocks at prices that are not inflated.

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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