The Market Trend Model (data sheet) moved to a mixed bias on Thursday just one day before trading closes for 2016. The "fast and furious" election rally seems to have lost its momentum and profit takers are doing just that, banking profits. Any further selling will move the Market Trend Model to a negative bias.
The Nasdaq (weekly chart) and the S&P 500 (weekly chart) are consolidating their recent gains as volume has diminished due to the holiday season. The Russell 2000 (weekly chart) and the Nasdaq-100 (weekly chart) show similar consolidation patterns.
When Reagan was elected the stock market saw an initial pop and then a larger decline. According to former Dallas Federal Reserve President Richard Fisher, "Ronald Reagan gets elected.The market, S&P 500, up 8.5 percent until he gets inaugurated.Next year, down 20 percent."
Perhaps tax selling begins in January or perhaps the market gives one more push into new highs. Whether the election rally continues into the new year remains to be seen. At least for now, it appears that investors may have one foot out the door...just in case.
The Market Trend Model (data sheet) moved to a neutral bias at the end of the week as stocks appear to have "sold out" after a nearly four week downtrend.
The Nasdaq (weekly chart) and the S&P 500 (weekly chart) both saw their weekly volume expand after these indexes undercut their recent lows of two weeks ago. Similarly, the Russell 2000 (weekly chart) saw its weekly volume expand as it undercut its recent low. Meanwhile, the Nasdaq-100 (weekly chart) saw its weekly volume expand as it came within a a few cents of its recent low. It appears (at least for now) the recent quarter of disappointing earnings has been priced into the stock market, leaving room for stocks to melt up in the ongoing central bank "easy money" economic environment. If nothing else, last week's price action/price lows draw a clear line in the sand for risk on/risk off.
The Market Trend Model (data sheet) moved to a negative bias at the end of the week with only the Nasdaq-100 maintaining a positive bias.
The Nasdaq (weekly chart) sits on its 40-week moving average while the Nasdaq-100 (weekly chart) and the S&P 500 (weekly chart) appear to be moving back to their respective 40-week moving averages. Meanwhile the Russell 2000 (weekly chart) just barely kissed its 40-week moving average as this index was unable to break through this key price area.
The stock market saw historic weakness in the beginning of 2016 only to be be followed by surprising strength during the past 8 weeks. As the stock market enters into earnings season one can be assured that anything can happen at any time.
The Market Trend Model (data sheet) maintains its positive bias, but the major indexes are starting to show some cracks as the unprecedented February 2016 rally runs into overhead resistance. It may be the sixth straight week of record high U.S. crude oil inventories (article) or the desperate tone of a fragmented U.S. Federal Reserve (article) that is starting to crack the market indexes ~ whatever the reason, it appears market participants are beginning to take profits at current price levels. The Nasdaq (weekly chart) is turning away from its 40-week moving average and the Nasdaq-100 (weekly chart) is sitting right on its 40-week moving average. The S&P 500 (weekly chart) is turning down toward its 40-week moving average and the Russell 2000 (weekly chart) is well below its 40-week moving average.
After the rapid six-week oversold rally, it remains prudent to protect profits and to have an eye on the exits.
The Market Trend Model (data sheet) maintains its positive bias as the stock market continues to wedge higher on ever decreasing volume. As I stated nearly three weeks ago when the current rally began, "At the moment the stock market has stabilized at current price levels...it appears the sellers of stocks are all sold out. I would expect a natural 'reaction rally' to occur over the next few weeks with the market indexes drifting higher into areas of resistance."
Now that the stock market indexes have moved higher and closer to the price levels where the August "break" occurred, I would expect the current rally to stall out in fairly short order as market indexes like the Nasdaq and the S&P 500 move into their respective 200-day moving averages.
A lack of true leadership adds to the prospect that this three-week wedging rally may be about to run out of juice. According to Louise Yamada Technical Research Advisors founder, "What we are seeing now is leadership in a lot of depressed stocks...while we're rallying we're seeing deterioration in some of the [former] leaders, one would suggest those rallies are not sustainable..." (aritcle).
The Nasdaq (weekly chart) shows 4,960 as an area of resistance, the Nasdaq-100 (weekly chart) shows 109 as an area of resistance, the S&P 500 (weekly chart) shows 2,080 as an area of resistance, and the Russell 2000 (weekly chart) shows 120 as an area of resistance.
The next few weeks should certainly be interesting as the meat of earnings season gets underway. While positive seasonality, current earnings, and future guidance remain as possible positive catalysts for stocks, slowing economic growth and overhead resistance continue to cause concern for any prolonged market rally. As always I remain mindful that anything can happen from one day to the next.