Stocks Hit New Highs Despite Seasonal Headwinds

by Sam Collins | July 7, 2014 2:38 am

Stocks rallied sharply in Thursday’s shortened session following a Bureau of Labor Statistics report that showed U.S. employers added 288,000 jobs in June versus expectations for 215,000. The unemployment rate dropped to 6.1% from 6.3% in May.

The Dow Jones Transportation Average set a new high, triggering another Dow Theory buy signal and drawing additional support for the industrials.

As might be expected in a rush to buy more aggressive stocks, the Dow Jones Utility Average fell and other defensive sectors, including precious metals, were down slightly. Utilities ended the week lower by 3.1% under heavy profit-taking.

At Thursday’s close, the Dow Jones Industrial Average gained 92 points at 17,068, the S&P 500 rose 11 points to 1,985, and the Nasdaq jumped 28 points to 4,486. The NYSE primary market traded 533 million shares with total volume of 2 billion shares, and the Nasdaq crossed 1 billion shares. On the Big Board, advancers outpaced decliners by 1.3-to-1, and on the Nasdaq, advancers led by 2.1-to-1.

For the holiday-shortened week, the Dow and S&P 500 rose 1.3%, the Nasdaq advanced 2%, and the Russell 2000 gained 1.6%.

Nasdaq Chart
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RUT Chart
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Despite the fact that we are near the beginning of what is historically the worst time of the year for stocks (May to October), and in the typically negative second year of the four-year presidential cycle, stocks rose to new highs led by small- and mid-cap stocks.

The recent breakouts in the Nasdaq and Russell 2000 reassert the familiar pattern of the higher-risk stocks leading and the major indices trailing that has characterized much of the third-longest bull market in history.

Conclusion: Thankfully, as a technician, it is not incumbent on me to explain the fundamental reasons for the market’s action, just its technical condition. And this is where many investors go wrong, and why most have stayed on the sidelines. To them, the market “doesn’t make economic sense,” so they stay out. What they fail to accept is the “discounting” nature of markets.

Most economic statistics (jobs, GDP, manufacturing, etc.) describe conditions that have already occurred and, thus, have little predictive value. Focusing on them is like looking into the rearview mirror of your car; it only tells you where you’ve been, not where you are headed.

Technical analysis, however, reflects the expectations of investors, the most important being those in the know, like business owners, suppliers, etc. This is why I have emphasized the forward-looking characteristic of the indices, and especially the Dow Jones Transportation Average, as a measure of future business performance. The transports made another new closing high on July 3.

Since cycle analysis is a source of information for technicians, it is prudent to be wary despite the new highs. August through October is usually the worst three-month period of the year. And we are approaching that period in a very “overbought” condition. The S&P 500 has gone 1,004 days without a normal 10% correction — the longest period without a correction in 30 years (July 1984 to August 1987), according to Sy Harding of Street Smart Report.

Traders should remain on the long side but taking smaller position with tighter stops. Long-term investors should hold mostly high-quality stocks but raise some cash to get to a 70/30 split so they have the ability to buy stocks in the event of a correction.

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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