Stocks ran to new highs again yesterday, as the Dow Jones Industrial Average (DJI) gained for the seventh straight day and the S&P 500 (SPX) gained for its third straight day. The Dow climbed to a 17-month high, its longest winning streak since August 2009.
Financial stocks moved higher following indications from the Fed that the economic recovery still needs the support of lower interest rates. But worries over new financial regulations limited gains in that sector. And health care was under scrutiny by Congress, as well, so the sector closed at just above breakeven.
Buyers were encouraged by a fall of 0.6% in the February producer price index (PPI) even though core PPI rose by 0.1%, which was expected. With wholesale level inflation in a zone that appears to be under control, the Fed is expected to keep interest rates low, and that encourages investors to place money into more high-risk areas.
Alcoa (AA) was the Dow’s strongest component, up 4.8% due to higher metal prices. Both Exxon Mobil (XOM) and Chevron (CVX) rose about 1%, which mirrored gains in oil.
At the close, the Dow was up 48 points to 10,734, the S&P 500 rose 7 points to 1,166, and the Nasdaq (NASD) gained 11 points to 2,389.
On the NYSE, advancers beat decliners by more than 2-to-1 with volume of just over 1 billion shares, while the Nasdaq traded 602 million shares with advancers ahead by 8-to-5.
Crude oil futures hit a two-month high yesterday, with the April contract settling at $82.93 a barrel, up $1.23. The Energy Select Sector SPDR (XLE) gained 63 cents to close at $59.05.
April gold rose $1.70 to $1,124.20 an ounce, and the PHLX Gold/Silver Sector Index (XAU) fell 15 points to 169.77.
What the Markets Are Saying
Stocks closed higher again yesterday, and even though both the S&P 500 and the Nasdaq have risen 9 of the last 10 trading days, it is a pace that can’t be sustained for much longer.
One measurement of value is the Relative Strength Index (RSI). The RSI is an overbought/oversold oscillator that is used to identify buying opportunities in market dips and selling opportunities in market rallies. It is a number between 0 and 100 with a lower number indicating an oversold market and a higher number an overbought market. Most traders use an RSI in the 70 to 80 range as an indication of an overbought market and a value of 20 to 30 as an oversold market.
Currently, the Dow is at 71.07, the S&P 500 is at 67.23, and the Nasdaq is at 76.39. The NYSE Composite (an index of all stocks traded on the NYSE) is at 73.45.
Every index is now at an RSI number in excess of the January high that was registered just before the mid-month correction that resulted in a 9%-plus pullback. And each is also very close to the highest readings in over a year.
Additionally, S&P notes that its momentum, internal indicators and sentiment numbers all are overbought.
In spite of this, stocks could move higher. But with each passing day, the chances of a correction go up too.
So, at this level, I would not recommend new positions until the overbought situation is resolved.
Special situations and short sales, as well as inverse exchange traded funds (ETFs) are naturally excluded from this recommendation. But new money targeted for equities should be temporarily held for a better investment opportunity, and short-term trades should be cashed in on days when stocks spike up.
A pullback to S&P 1,100 to 1,130 is probable, so I’m not looking for a major change in trend, but it is time to accumulate cash until stocks come more in line with reasonable value.
Today’s Trading Landscape
Earnings to be reported before the opening include: CRA International, FedEx, GameStop Corp., Marcus Corp., New York & Co., Ross Stores, Shoe Carnival, Stein Mart, Vimpel Communications and Winnebago Industries.
Earnings to be reported after the close include: Addus HomeCare, Cintas, ICX Technologies and Palm.
Economic reports due: consumer price index (the consensus expects 0.1%), jobless claims (the consensus expects 455 K), leading indicators (the consensus expects 0.2%), Philadelphia Fed survey (the consensus expects 18), EIA natural gas report, Fed balance sheet and money supply.
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