Market Not Overbought Despite Big Gains

by Sam Collins | December 23, 2013 2:43 am

On Friday, the Dow Jones Industrial Average not only set another new high but, according to The Wall Street Journal, it “closed at a record after adjusting for inflation.” This means that the index has finally regained all of the lost ground of the past 14 years. The Journal said, “In that sense, the stock market’s ‘lost decade,’ which in fact lasted longer than a decade, is finally ending.”

The S&P 500 also set a new record high as it gained 0.5%, with technology, its largest sector, up 0.9%. Apple (AAPL[1]), Microsoft (MSFT[2]) and Google (GOOG[3]) were all big winners. And because of the heavy weighting on technology, the Nasdaq gained 1.2%. The Nasdaq was also pushed higher by the biotechnology sector. iShares Nasdaq Biotechnology (IBB[4]) gained 2.6%.

A Commerce Department report said that the economy grew at 4.1% in Q3, up from an estimate of 3.6%. And both job creation and industrial production are doing better than expected.

At Friday’s close, the Dow Jones Industrial Average was up 42 points at 16,221, the S&P 500 rose 9 points to 1,818, and the Nasdaq jumped 47 points to 4,105. On the primary market of the NYSE, 1.9 billion shares traded with total volume of 4.9 billion shares, aided by quadruple witching and quarterly rebalancing. The Nasdaq traded total volume of 3 billion shares. On the Big Board, advancers outpaced decliners by over 3-to-1, and on the Nasdaq, advancers were ahead by 2.6-to-1.

For the week, the Dow gained 3%, the S&P 500 rose 2.4%, and the Nasdaq was up 2.6%. Year to date, the Dow is up 23.8%, the S&P 500 has gained 27.5%, and the Nasdaq is ahead 35.9%.

 Dow Chart
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Chart Key[5]

The new inflation high of the Dow industrials is a major achievement. Not only because of the “inflation adjusted” factor, but because it was accompanied by huge volume (yes, influenced by witching, etc.), good breadth, underlying sentiment and internal indicators that tell us there is more to come.

DJT Chart
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The Dow Jones Transportation Average supported the breakout of the industrials by setting a new closing high. Purists may argue that a Dow Theory buy signal has not yet been generated, and they are correct. Until the high at 7,324 from Dec. 2 is exceeded, we will have to be content with what we have. But what we have is a sudden spike in buying supported by a new MACD buy signal. This week, the bull may take care of the minor details.

SPX Chart
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Like the other indices, Friday’s breakout in the S&P 500 is very significant. Its base was the support at 1,729 to 1,775. It tested the top of that range three times in November and December, and then jumped away from it on huge volume and, like the other indices, established a new MACD buy signal.

Conclusion: There is little doubt that the uptrend (if not the bull market) has been confirmed. The advance has been accompanied by high volume and good breadth. And even after Friday’s big pop, our internal indicators are still not overbought.

I promised targets for the new year and will provide them sometime this week. I’d like to study data from similar breaks and multiple trendlines and market-timing devices before committing to new targets.

The next two weeks will probably not give much direction since volume usually drops sharply and breadth gets muddled by year-end tax selling and adjustment. Thus, the only advice that I will leave you with is to buy quality stocks on any pullback. And don’t chase high P/Es. Other than that, have a very Merry Christmas and don’t forget “the reason for the season.”

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. AAPL:
  2. MSFT:
  3. GOOG:
  4. IBB:
  5. [Image]:
  6. click here:
  7. click here:

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