Wednesday, November 23, 2016

An Equity Market Finding Little Upside Resistance

Today the Dow Jones Industrial Average Index closed at another record high of 19,083.18, crossing another 1,000 point interval on Tuesday. It has taken nearly two years for the index to breach this 1,000 point interval after breaking 18,000 in December 2014. The market advance following the election is beginning to sound like a broken record as commentators announce the market's close at a "new all time high" at the end of each trading day.

Emotionally, it feels as though the market is due for a pullback, and for investors in cash, a pullback is being hoped for. A pullback will come just as night follows day; however, the market being a weighing machine as it is, a better investment environment continues to get more priced in based on potential policy changes in Washington.

Turning to the broader S&P 500 Index, the S&P is up 5.6% since the beginning of election week and up 20.4% since the February 11 taper tantrum low. Setting emotions aside and looking at the market technicals, the money flow index and the stochastic indicator appear to indicate the market is near overbought.

However, working in favor of potentially higher prices is the fact the market action has been one of rotation out of sectors that worked in a slow growth economic environment into ones that would benefit from faster economic growth. So in spite of a market that posts new highs nearly each trading day, the percentage of stocks trading above their 50 and 150 day moving averages is far from indicative of an over bought market. Additionally, as the above chart shows, the advance-decline volume is trending higher and surpassed its peak in September at the same time the number of issues trading higher has yet to surpass its September peak. This is a sign of underlying rotation taking place in the market.

Also, the following two charts are from The Kirk Report and they show the 'technicals' favor higher prices for the market. The first chart below is a weekly chart for the S&P 500 Index and a double bottom pattern has formed for the market with a target price of 2,365 for the S&P 500 Index. The second chart below is a quarterly one going back to the mid 1990's and a double bottom reversal pattern has also formed with a target price for the S&P 500 Index between 2,337 and 2,485.

So setting emotions aside and simply looking at market technicals it appears the market wants to move higher. From a fundamental perspective, S&P 500 earnings are tracking to be up nearly 4% on a year over year basis for the third quarter, the first positive earnings growth quarter since the first quarter of 2015. If policies proposed be the new administration in Washington, D.C. are implemented, this shot of stimulus is likely to translate into faster economic growth with equity prices following. Remembering though, equity prices do not move higher in a straight line.

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