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Raise Cash in This Overbought Market

The charts remain positive, but I encourage readers to become more liquid


On Monday, stocks opened higher following better-than-expected earnings from Citigroup (C), which rose 3%. Financial stocks retreated for the remainder of the session.

The Dow industrials rose to a new intraday high but didn’t close at one. However, Dow Theory followers will be inspired by the Dow transports, which closed at a new high. We should expect the industrials to follow with a new closing high very soon.

The S&P 500’s strongest group was technology, led by Apple (AAPL), Google (GOOGL), Facebook (FB) and IBM (IBM).

Kodiak Oil & Gas (KOG) rose 4.8% after agreeing to be acquired by Whiting Petroleum (WLL) for $6 billion. I recommended KOG as the Trade of the Day on Wednesday.

With the emphasis on financials and technology stocks, defensive sectors fell or lagged. The Dow Jones Utility Average lost 1.1%, and health care stocks made only small gains. Gold fell 2.3%, closing at $1,306.70 an ounce, while silver lost 2.5% at $20.92.

Federal Reserve Chair Janet Yellen is scheduled to appear before the Senate Banking Committee today to provide her semiannual testimony on the economy and economic policy.

At Monday’s close, the Dow Jones Industrial Average rose 112 points to 17,055, the S&P 500 gained 10 points at 1,977, the Nasdaq was up 25 points at 4,440, and the Russell 2000 rose 6 points to 1,166. The NYSE traded total volume of 3.2 billion shares, and the Nasdaq crossed 2.2 billion. On the Big Board and Nasdaq, advancers outpaced decliners by 1.7-to-1.

DJI Chart
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DJT Chart
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Chart Key

Dow theorists like to see new closing highs on both the Dow industrials and transports on the same day or they term the event a “non-confirmation.” I accept the Dow Theory as the best overall predictive tool in our basket, but I would not go so far as to say that each new closing high must appear on the same day.

The Dow industrials did make a new intraday high, and the closing high was missed by just 13 points. Look for the new high on the industrials this week. Both charts are very bullish.

NYSE Chart
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One of our readers was kind enough to direct us to a chart of the NYSE Composite (one of my favorite indices) showing that the index was overbought. The chart showed that the price line had exceeded the upper channel resistance line. But I could not replicate the same chart, even after drawing the upper line from as far back as September 2012. I then drew the Bollinger Bands and found that Monday’s close was smack in the middle of the upper and lower bands. However, the opening gap will probably close in short order.


Despite approaching the toughest time of the year (August through October), stocks are still strong. However difficult it is to take profits, I believe that prudence dictates that we continue to raise cash.

Jeffrey Saut of Raymond James is convinced that we are still in a mega or cyclical bull market that could last for a total of 10 years. However, on CNBC, he warned of a pending correction due to the near-term overbought condition of the market and its “negative seasonality.”

I tend to agree with both theses, and thus, despite the positive charts and the market’s rally in the face of negative news, encourage readers to become more liquid. It’s never wrong to take a profit.

Today’s Trading Landscape

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

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

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