Do Not Buy This Rally Yet

by Sam Collins | January 15, 2014 2:43 am

Just one day after the worst day of the new year, stocks turned and scored their biggest advance so far. The surge in buying was attributed to stronger-than-expected retail sales during the holiday shopping season. Retail sales rose 0.2% in December, while an increase of 0.1% was expected. When auto sales were excluded, core sales were up a whopping 0.7%.

Small business owners’ optimism grew in December as the index measuring their sentiment rose 1.4 points. However, the National Federation of Independent Business said the index was still short of its recovery high of 95.4 and well below normal readings of over 100 in other post-recession periods.

Google (GOOG[1]) jumped 2.4% on news that it is buying Nest Labs, a home automation company. And Apple (AAPL[2]) gained almost 2% as technology stocks led the advance despite an earnings miss by 3D printing company Stratasys (SSYS[3]), which fell 8.2%.

Banks advanced following better-than-expected earnings from JPMorgan Chase (JPM[4]) and Wells Fargo (WFC[5]).

At Tuesday’s close, the Dow Jones Industrial Average rose 116 points to 16,374, the S&P 500 gained 20 points at 1,839, and the Nasdaq popped 70 points to 4,183. The total volume traded on the NYSE was 3.4 billion shares, and the Nasdaq traded 2 billion. Advancers outpaced decliners by 2.3-to-1 on the Big Board, and advancers led by over 3-to-1 on the Nasdaq.

DJI Chart
Click to Enlarge

Chart Key[6]

Despite the recovery rally, which closed above the 20-day moving average at 16,343, the Dow industrials have reversed from an all-time high. The close above the 20-day moving average is a plus, but the near-term downtrend has not been broken.

DJT Chart
Click to Enlarge

The break to new highs by the Dow transports on Friday was followed by Monday’s sell-off. Had the selling continued, the near-term trend would have turned down; however, Tuesday’s rally “saved the day,” at least temporarily.

Conclusion:  Despite the triple-digit rally in the Dow industrials, the near-term future of the market is still in doubt. We are again faced with a possible Dow non-confirmation in that the Dow transports made a new high, but the industrials have confirmed a short-term downtrend. Until this conundrum is resolved, new investments should be tabled and short-term traders should consider selling into rallies and resort to short-selling strategies.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[7].

For a list of this week’s economic reports due out, click here[8].

  1. GOOG:
  2. AAPL:
  3. SSYS:
  4. JPM:
  5. WFC:
  6. [Image]:
  7. click here:
  8. click here:

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