Rev Shark:
The big question as we start a new week is whether the market can keep its winning streak going as the post-election glow fades. The S&P 500 has been up nine days in a row, and the Nasdaq is up eight out of nine days. A good jobs report on Friday helped keep the bullish cause rolling, but even the most ardent bull is likely to admit that we are a bit technically extended at this point.
One of the key ways to judge the market's health is to watch how it acts when it is resting. As the euphoria of major gains subsides, do market participants come to realize that their recent buying binge was ill-advised and without a sound basis, or do they regroup and reaffirm their convictions and prepare to keep things moving once they have rested a bit?
The action during a period of rest can provide very good clues as to the true character of a market. Support levels become apparent, and we can see how well they hold. Do we hold the nearest levels, or do we pull back deeper? How shallow are the dips? Volume during a pullback is also very important. If it is strong and broad, then we know that professional sellers are liquidating and not looking for a rebound after a rest. A lighter-volume pullback would be a sign of healthy profit-taking that would set up further upside as stock moves into the hands of stronger, more bullish buyers.
We have had very strong upside volume lately, which is a sign that big funds are fueling this move. If we pull back on lighter volume, as I believe is likely, that would be a sign that we are setting the stage for higher prices into the end of the year. On the other hand, heavy-volume distribution days would indicate professional liquidation and be a clue that we need to be more cautious.
The market has been acting very healthy lately, but there are a few areas of concerns to keep in mind. The dollar has been very weak lately, and that has been fueling a run in gold stocks. The stock market has not been too affected by this over the past year, but eventually it will take a toll on foreign investors who are hurt by currency losses. Another troubling sign was some pretty aggressive profit-taking in some of the high-beta technology leaders such as Research In Motion (RIMM:Nasdaq), Yahoo! (YHOO:Nasdaq), Ask Jeeves (ASKJ:Nasdaq) and Google (GOOG:Nasdaq). That may have just been some isolated action, but we need to keep an eye on what is happening there.
We have a few news events that are likely to stir things up a bit. The FOMC will be making its interest rate decision on Wednesday at 2:15 pm ET. Current expectations are for a quarter-point hike, but the good jobs report on Friday may raise concerns about a more aggressive approach in the future.
We also have earnings this week from Cisco (CSCO:NYSE) and Dell (DELL:Nasdaq). Both stocks have been participating in the recent rally, and it will be interesting to see how much good news has already been discounted by this action.
Early action is slightly negative. Asian stocks were soft because of concerns about the weak dollar, and Europe was mixed. Crude oil is ticking down, but overall it's pretty quiet so far this morning.
Gary B. Smith:
