Don’t Chase Stocks in This Five-Year-Old Bull

by Sam Collins | March 10, 2014 2:43 am

On Friday, stocks closed mixed following a positive week that saw new highs in a majority of the widely followed indices. Friday’s non-farm payrolls report showed an increase of 175,000 jobs in February versus an expected 152,000. But the unemployment rate rose to 6.7% from 6.6% in January.

The Nasdaq was weak as a second day of profit-taking in the biotech sector coupled with weakness late in the day in other technology stocks kept a lid on a possible recovery. The S&P 500 held onto its gains thanks to strength in the financial sector, which posted a 3% gain for the week.

At the close, the Dow Jones Industrial Average was up 31 points to 16,453, the S&P 500 rose 1 point to 1,878, and the Nasdaq fell 16 points to 4,336. The NYSE’s primary market traded 723 million shares with total volume of 3.6 billion shares. The Nasdaq crossed 2.1 billion shares. On the Big Board, decliners outpaced advancers by 1.3-to-1, while on the Nasdaq, there were only slightly more decliners than advancers.

For the week, the Dow rose 0.8%, the S&P 500 gained 1%, the Nasdaq was up 0.7%, and the Russell 2000 gained 1.7%.

Nasdaq Chart
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Chart Key[1]

The Nasdaq broke to a new 13-year closing high on Thursday but gave back the gains on Friday. The index is slowing its advance slightly, and that is showing in MACD and other momentum indicators. Immediate support rests at the 20-day moving average, and a fall to that level would close the gap opened earlier in the week.

RUT Chart
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The Russell 2000 broke to new intraday and closing highs last week. The breakout was from a very bullish “V” formation that bottomed precisely at its intermediate trendline early in February. Both MACD and momentum are strong, but a small horn formation has developed, which could slow the advance until that is resolved.

Conclusion: Despite economic and political uncertainties, stocks continue to make new highs. The advance is characteristic of a bull market that has considerable strength behind it. Institutional interest is demonstrated by higher-than-average block trading, while average investors’ bearishness increased by over 5% last week, according to AAII’s sentiment survey.

I focused on the small- and mid-cap stocks for this report, but the broad-based S&P 500 scored four consecutive new intraday highs last week. The highs were accompanied by higher volume, and group rotation was very active.

Everything points to higher prices, but that doesn’t mean that daily adjustments won’t occur. When they do, we should use them to take new positions in high-quality, oversold stocks. Patience is the key to success, and chasing stocks that are making new highs is a high-risk proposition in a stock market that is celebrating its fifth year as a bull.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[2].

For a list of this week’s economic reports due out, click here[3].

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