Stocks concluded a solid week of gains with a quiet session last Friday. The major indices traded in a narrow, sideways range before finishing with mixed results. The Nasdaq Composite and S&P 500 were higher by 0.3% and 0.2% respectively, but the Dow Jones Industrial Average fell 0.2%. The small-cap Russell 2000 gained 0.2% and the S&P Midcap 400 advanced 0.3%. Although it got off to a slow start, a positive reaction to last Wednesday’s meeting of the Federal Reserve Board enabled the broad market to finish with impressive gains. For the week, the S&P 500 rallied 1.8%, the Nasdaq Composite 1.6%, and the Dow Jones Industrial Average 1.3%. Small and mid-cap stocks were even stronger, as the Russell 2000 zoomed 2.7% higher and the S&P Midcap 400 cruised to a 2.9% gain.
After two straight sessions of higher than average turnover, traders took a rest last Friday. Total volume in both the NYSE and Nasdaq declined by 15%. Market internals were marginally positive. Advancing volume in the NYSE exceeded declining volume by 1.2 to 1, while the Nasdaq ratio was positive by 1.7 to 1. The Nasdaq closed higher every day of last week and the S&P 500 gained every day except Monday, but both indices only registered one “accumulation day” by rallying on higher volume last Wednesday.
Despite a shaky start to the new year, most of the major indices are once again at new highs. The S&P 500 is trading at a new six-year high, while the Dow Jones, Russell 2000, and S&P Midcap 400 indices concluded the week at fresh all-time highs. Only the Nasdaq Composite, which failed its breakout attempt in mid-January, remains in a range. The market has certainly been resilient and the overall trend remains “up,” but we noticed that rallies over the past month lack the power they formerly had. Rather than valiantly galloping to new highs, driven by powerful sessions of institutional buying, the major indices have been grinding out their gains with minimal momentum. Such action could conceivably carry on for a long time, but we view it as a market that is getting tired. So what has prompted this potential change in the market’s underlying momentum? A look at the long-term monthly charts may shed some light on the situation.
As short-term traders, we tend to focus primarily on chart patterns that develop on the hourly, daily, and even weekly charts. However, studying the long-term monthly charts on a regular basis is important because it enables one to know the “big picture” of where the market stands. In turn, it becomes easier to make sense of perceived changes in market sentiment. Below is a monthly chart of the S&P 500 Index:
As you can see, the S&P has been trending steadily higher for nearly four years, since about the middle of 2003. From 2003 through 2006, a clearly defined trend channel developed, which is illustrated on the chart above. Until the end of 2006, every rally into resistance of the upper channel was followed by an eventual move down to support of the lower trend channel. But since November 2006, the S&P has been trading above resistance of the upper trend channel. Furthermore, January marked the eighth consecutive month the index has closed higher. The last time the S&P managed to gain for eight months in a row was from November 1995 through June 1996, more than ten years ago! During that period, the S&P 500 rallied 15%, but the ninth month was nasty. In July of 1996, the index plummeted as much as 9.7%, more than 60% of its eight-month gain, before closing the month with a 4.6% loss. Curiously, the current eight-month winning streak in the S&P stands at a very similar 14% gain.
Obviously, we have no way of knowing if this history will repeat itself this month, but this historical information should at least serve as a reality check for bulls who are fearlessly buying at current levels. The parabolic rally above the upper channel of the long-term uptrend, combined with the fact that the S&P has not seen a meaningful correction in nine months, should serve as a yellow flag for astute traders. We’re not advocating fighting the long-term uptrend, but merely warning against a stock market killer named “complacency.”
There are no new trade setups for today.
Daily Performance Report:
Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below:
Open positions (coming into today):
GLD long (300 shares from Jan. 23 entry) –
bought 63.90, stop 61.79, target 69.30, unrealized points = + 0.38, unrealized P/L = + $114
QID long (400 shares total – 300 shares from Jan. 22 entry, 100 shares from Jan. 31 add) –
bought 53.23 (avg.), stop 51.10, target 58.35, unrealized points = (0.71), unrealized P/L = ($284)
Closed positions (since last report):
Current equity exposure ($100,000 max. buying power):
No changes to the open positions.
Edited by Deron Wagner,
MTG Founder and