Take Sharper Aim in This Neutral Market

by Sam Collins | March 21, 2014 2:24 am

On Thursday, stocks started the day lower but turned higher just before noon following a positive manufacturing report from the Philadelphia Fed.

With warmer weather in the forecast, both manufacturing and retail representatives expressed optimism. A more positive approach to stocks seemed to have an impact on the majority of sectors. Financials gained 1.6%, technology was up 0.8%, and telecom services rose 1.6%.

The gains wiped out most of Wednesday’s losses that were due to a possible interest rate increase from the Fed. But not all of the losses were erased. Utility stocks and REITs lagged other industry groups.

At the close, the Dow Jones Industrial Average was up 109 points at 16,331, the S&P 500 gained 11 points at 1,872, and the Nasdaq advanced 12 points to 4,319. The NYSE traded a total of 3.3 billion shares, and the Nasdaq crossed 1.8 billion. On the Big Board, the number of stocks advancing equaled those declining, while on the Nasdaq, advancers outpaced decliners by 1.13-to-1.

DJI Chart
Click to Enlarge

Chart Key[1]

The Dow industrials’ chart is neutral. Despite overcoming Wednesday’s losses, it can’t seem to muster enough volume to punch to new highs. It is wavering around its 50-day moving average, now at 16,135, and MACD is improving, but the best that can be said is that it has an intermediate-term neutral bias.

DJT Chart
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Even though the Dow transports’ chart is more positive than the industrials’, Thursday’s decline does not strengthen the bulls’ case. We still hope to see new highs from both the industrials and the transports, which would signal a new Dow Theory buy signal. But the inability of the transports to muster a plus-day when the industrials jumped triple digits is not a good sign.

Conclusion: Despite the failure of the Dow transports to move higher, the overall tape is still positive. And most of our internal indicators, chiefly MACD, momentum, stochastic and RSI, are positive as well, indicating that the path of least resistance is still up.

But neither price action, internal chart signals nor sentiment indicators, are strong enough to suggest that a breakout is imminent. For example, the new AAII Sentiment Survey (a contra-indicator) shows that bullish sentiment has been neutral for the past six weeks. And volume, though higher on up days than down days, is still very low and therefore not characteristic of a strong push higher.

In a neutral trending market, it is best to use a focused buying approach. Thus, broad commitments should be set aside in favor of buying specific outperforming groups like financial and biotechnology stocks instead of mutual funds or ETFs specializing in a broad category like growth or value. In other words, use the rifle rather than the shotgun for your daily stock hunting and your performance will likely improve.

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].

  1. [Image]: https://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  2. click here: http://www.bloomberg.com/apps/ecal?c=US
  3. click here: http://www.bloomberg.com/markets/economic-calendar/

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