Despite a week shortened by the Thanksgiving holiday, on Wednesday all of the major indices closed at new highs except the Nasdaq, but it joined the others on Friday’s half session with a fresh closing high. The expected reduction in corporate taxes, reduced regulation and greater infrastructure spending was cited as the primary reasons for the gains.
For the Dow industrials, Friday concluded the third consecutive week of gains. This, according to The Wall Street Journal puts the index on track to close at a 10% annual gain, the Dow’s best annual finish in three years. On Friday the DJIA rose 0.4%, the S&P 500 gained 0.4%, the Nasdaq rose 0.3% and the Russell 2000 gained 0.4%. All closed at record highs. Since the presidential election the DJIA is up 4.5%, reaching a new record for every session since Nov. 14.
However, on Friday oil prices had the biggest daily loss in two months. The decline was attributed to skepticism regarding the ability of the major producers to reach an agreement to cut production. Light, sweet crude (January delivery) fell 4% to $46.06 per barrel. But another energy resource, natural gas, has become a dependable export, with the U.S. shipping more natural gas than it imports for the first time in almost 60 years. The Energy Department says that the U.S. will be the world’s third largest producer of LNG.
The dollar vs. a basket of 16 currencies fell 0.3% on Friday, but this followed a close on Thursday’s world markets at its highest level since 2002.
At Friday’s close the Dow Jones Industrial Average rose 69 points at 19,152, the S&P 500 gained 9 at 2,213, Nasdaq closed at 5,399, up 18, and the Russell 2000 gained 5 points to close at 1,347. The NYSE’s primary exchange traded 409 million shares with total volume of 1.6 billion shares, and the Nasdaq crossed 768 million shares. On the two major indices, advancers outpaced decliners by 1.8-to-1. Blocks on the NYSE fell to 2,931 from 4,993 on Wednesday.
For the week: The DJIA gained 1.5%, the S&P 500 rose 1.4%, the Nasdaq added 1.5% and the Russell 2000 jumped 2.4%.
Last week I reviewed the charts of the DJIA (Monday), compared the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) exchange-traded fund with the S&P 500, and on Wednesday projected the Dow’s breakout target to be 20,000, just 5% above Tuesday’s close. Today we will study the SPDR S&P Midcap 400 ETF (NYSEARCA:MDY):
Before last week’s blast-off, the S&P mid-caps (MDY) had a resistance line drawn from the September high at $288.40. On Nov. 14, that high was exceeded, and since then the ETF has made new closing highs in seven of the last eight sessions. Volume has been very high for a pre-holiday period. MACD is now overbought and declining.
Conclusion: As noted last week, we are experiencing a major breakout within a secular bull market. Therefore, even though some of our indicators, like MACD, appear overbought, they can become even more overbought. The AAII Sentiment Survey stayed neutral for months, but now the bulls have taken the lead with almost 50% bullish and 22% bearish; 28% are still neutral. This dramatic change from Nov. 3, when only 23.6% were bullish, is a meaningful shift indicating that new money from defensive sectors like utilities and telecommunications as well as cash reserves are committing to a “risk-on” approach.
Traders should not jump to take profits, since the market is telling us that a dynamic change is taking place. If you trade now you must make three almost perfect decisions: where to sell, where to buy back, and where to sell again. I suggest letting this breakout play itself out as we enter one of the most profitable periods of the year.
Long-term investors should hold good-quality stocks. The favored sectors continue to be retail, coal, construction, mining, food & restaurants, transportation and biotechnology (new addition).
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.