The market started out higher, but the sellers showed up immediately. They kept on going until the last 15 minutes when a notable rally into the close took place. SPX closed below its 20 SMA. The breadth ended at -52%. It was never higher then -58% so the selling was not all that broad. Some big cap tech stocks were hit as evidenced by QQQ being down 1%. New highs were 61. New lows were stable again at 17. Some profit taking in some of the bigger winners this year. Probably trying to get a jump on the selling that is supposed to happen next week.
The futures tried to bounce overnight, but could not get back above the 50 SMA. We now have a confirmed break of that line. First time that has happened since the election.
The red count shot up some more today. It is the highest since back in Sept. It is a bit below the oversold level, but higher then the last two swing lows.
Despite the straight up nature of the rally the bull pressure chart indicates the move is not particularly strong. None of the time frames show the green line getting above the red line from the last sell off. The intermediate green line got right up to it though. The selling pressure was not all that high into the Nov. low. That makes the lack of strength on the rally more troublesome. The bar was not that high for the green lines to get over. This type of action usually means there is more corrective activity to come.
The break out in the transports may have failed. Not only is the index back below the break out level it has a confirmed break of the break out day low. The bulls could still show up and save the day, but at this time it is possible the Dow theory buy signal ends up being negated. That buy signal was widely publicized of course. I doubt there will be any word of it failing. In Daily update 12/7 Dow Theory buy signal I wrote
"Now that we have a Dow theory buy signal what happens now. The Dow theory sell signal back in Feb. marked the exact closing low for the Dow. In other words it was a massively failed signal as there was no further downside. Is this the start of a really big break out? Could it be we end up with another massively failed signal? I sure wish I knew. "
At the moment it is not looking like a really big break out. It remains to be seen if it turns out to be a massively failed signal. From what I can see at the moment that would not be a surprise.
The NASDAQ 100 index lagged through out the post election rally. It finally made a new high, but could not progress significantly higher. That break out failed today as NDX fell back into its fall trading range. I believe this to be a very important event.
The pundits on TV assure us that great economic growth is right around the corner. The market is saying otherwise. The main growth index is NDX with the transports being a close second. Both of these indexes lagged behind in getting to new all time highs and both have failed their break outs. I think the market is speaking loud and clearly it is not expecting strong economic growth. That happens to match what I see in the economic data to this point. Everything still looks consistent to this being a final blow off top and a likely end to the bull market. I saw this today which made me even more sure we have the right sentiment conditions for "the end". An economist who predicted a 17,000-point stock-market crash just 10 days ago is suddenly bullish
Harry Dent is bullish.
Dent, an economist and one of the biggest doubters of the stock market's rise since the end of the recession, said he no longer believes a crash is imminent for the market after persistently calling for a massive drop over the past seven years.
What changed the mind of the man who said that the market would be "cut in half" in 2011, called for a "year and a half" long crash in 2013, and said the Dow could fall 17,000 points as recently as December 10?
The markets ability to withstand the election of Donald Trump.
"All of my research pointed to signs that the end was near," wrote Dent in a blog post last week. "The Dow was set to shed thousands of points in short order. How much has changed since November 8…"
According to Dent, the market shift to seeing Trump as an economic positive instead of a destabilizing force was stunning.
I agree that the shift in the market after the election was stunning. I have called it just amazing many times in this blog. However, I fail to see how that means the future is all bright and rosy. When SPX was making new lows in March of 2009 was it a sign the economy was crashing? Not exactly. Markets overshoot in both directions. They have been known to discount things that never happen. Harry Dent makes me look like a perma bull. Him flipping to bullish may go down as one the best contrarian signs in a long time.
SPX is still in position to bounce. If we get confirmation of a break of the 20 DMA next week then a trip to the 50 DMA may be in the cards. A bounce to a lower high would also be problematical. Will the sellers that held off for tax purposes show up as many people expect? I don't know, so many times the market does the opposite of what most expect it to do. I guess we will see.
I don't like to make predictions about the market. Unless you make a lot of them it is a futile effort. If the U.S. goes into a recession then it will be a bad year for stocks. If not, then maybe it is a great year. At the moment the economic data suggests to me that recession odds are high. Technically and sentiment wise we have what looks like a textbook bull market top. Complete with retail investors piling in, bear capitulation, and a magazine cover. The long awaited rise in volatility could happen next year.
All three indexes entered short term downtrends today. Time to bounce of the selling could pick up a bit.
In order to start the weekend off on a light note I introduce a new tradition. Joke Friday. Here is the first installment.
Have a great weekend. I wish all a very happy, healthy, and prosperous new year.
Bob
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