Market Due for a Correction, but Don’t Expect One

by Sam Collins | December 2, 2013 2:57 am

On Wednesday, the Dow industrials posted their fifth consecutive all-time high. Then, after advancing 77 points in early trading Friday, profit-taking ensued and the shortened session produced and a loss of 0.1%. However, the senior index did achieve another new intraday high.

The small-cap Russell 2000 and mid-cap Nasdaq advanced on both Wednesday and Friday.

Though neither the Dow nor the S&P 500 could score a gain on Friday, each has registered a gain for eight consecutive weeks. That is the longest weekly winning streak for the Dow in two years.

Good retail sales news followed stocks’ gains as early figures from Thanksgiving Day and Black Friday indicated that shoppers spent more in both brick-and-mortar stores and online than they did in 2012. Sales were up 2.3%, according to a ShopperTrak report. And a survey by Nielsen Co. showed that 85% of Americans said they were avoiding retail stores on Black Friday, and 46% said they planned on shopping online on Cyber Monday. This enhances the possibility of even better sales numbers this holiday season.

At the close on Friday, the Dow Jones Industrial Average was off 11 points at 16,086, the S&P 500 fell 1 point to 1,806, and the Nasdaq rose 15 points to 4,060. The primary NYSE market traded 474 million shares with total volume of 1.6 billion shares, while the Nasdaq’s total volume reached 853 million shares. On the Big Board, advancers inched ahead of decliners by 1.2-to-1, and on the Nasdaq, advancers were ahead by 1.6-to-1.

For the month of November, the Dow rose 3.5%, the S&P 500 gained 2.8%, and the Nasdaq was up 3.6%.

SPX Chart
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In November, the S&P 500’s 17-month moving average continued its bullish thrust to new highs.

In prior years, reversals that led to bear markets followed 8.1% and 8.4% premiums to the moving average. In October, with the index at 14.8% above the moving average, I concluded that a consolidation was in order[1]. Instead, the Dow almost immediately broke from five months of slumber, and the technology sector screamed to new highs. Now, with the S&P 500 at 16.1% above its 17-month moving average, it would seem that stocks should be due for a correction. But please read on…

Dow Chart
Click to Enlarge

Chart Key[2]

The Dow’s breakout was a clear vote by investors for stocks over bonds. The Federal Reserve governors vacillated on cutting bond purchases, and time ran out as none felt it proper to move ahead with any adjustment in policy prior to the approval of a new Fed chair. Janet Yellen will likely continue the present plan. But even more important, the economic numbers that should bolster stocks once QE buying retards are showing signs of improvement.

Friday’s Key Reversal Day should be ignored because of the typically low volume in the holiday-shortened session.

QQQ Chart
Click to Enlarge

Technology stocks are humming along, and that is considered to be positive for the overall market. Over 54% of the holdings that make up the PowerShares QQQ (QQQ[3]) are technology stocks, with the top five being Apple (AAPL[4]), Microsoft (MSFT[5]), Google (GOOG[6]), (AMZN) and Intel (INTC[7]).

QQQ’s recent break to new highs, coupled with a fresh MACD buy signal, is a powerful sign that the broad market has strong underpinnings.

RUT Chart
Click to Enlarge

The chart of the Russell 2000 received a new MACD buy five sessions ago and appears capable of blasting through its bullish resistance line. This, too, could accelerate the broad market’s advance.

Conclusion: Last week, the Nasdaq broke above 4,000 for the first time in 13 years, the CBOE Volatility Index (VIX) is holding above its lows (a positive), and most importantly, the trends of the major indices are positive.

We could always have a minor correction, but historically, it is during December that institutional investors “dress up” their portfolios before year end by purchasing large-cap stocks, and then enter the new year with new positions in more speculative equities. The charts are positive, and we should be too.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[8].

For a list of this week’s economic reports due out, click here[9].

  1. I concluded that a consolidation was in order:
  2. [Image]:
  3. QQQ:
  4. AAPL:
  5. MSFT:
  6. GOOG:
  7. INTC:
  8. click here:
  9. click here:

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