Market Analysis and Summary
The market gapped up at the open on Friday. The NASDAQ found its way back back above its key 50-DMA within the first fifteen minutes of the session and leading stocks were headed higher. Unfortunately, the rally sputtered out at roughly 11:00 m EST and faded for the rest of the day. Three of the four major indexes managed to eke out higher closes, however, they finished the session near their lows for the day, which is indicative of distribution. Volume declined across the board, softening the overall negative action, although the distribution count stands at 5 days on the NASDAQ and 7 on the S&P 500, which is still on the high side.
The number of leading stocks that are holding up constructively continued to deteriorate on Friday. The hot, new IPO’s, which led the market until about a week ago, continued to cool off and there was little evidence, if any, indicating where money might be looking to find a new home. This will be an important factor in the coming days and weeks, as the health and sustainability of the rally will depend heavily on healthy rotation. Ideally, we want to see money remain invested in leading growth stocks. It should rotate out of the stocks that have become extended over the last couple months and into some newer names, that have formed constructive bases and are getting ready to break out.
Things could still go either way from here, so caution is highly recommended. While we would still consider buying a potential leader, with superb fundamentals, given an “optimal entry point,” we would not have more than 20% of our total portfolio invested, given the current environment. Always remember, cash is a position. Not only do you protect your hard earned financial capital from getting chopped up in a volatile environment, you also preserve, ever so precious, mental/emotional capital.
The NASDAQ closed 0.02% higher as volume declined, although it reversed sharpy off its highs, to finish near its lows for the day and back below its 50-DMA.
The Russell 2000 fell 0.27% as volume declined and continues to live below its 50-DMA, which is now rolling over and converging with its 10 and 21-DMA’s to the downside.
The S&P 500 reversed sharply off of its highs for the day, after failing to reclaim ist 10-DMA, no less its 50-DMA. The index rose 0.02% for the day as volume on the NYSE declined, although it closed near its lows for the session, which is indicative of distribution.
The DOW reversed off of its highs for the day, after failing to reclaim ist 10 and 21-DMA’s, no less its 50-DMA. The index rose 0.22% for the day as volume declined, although it closed near its lows for the session, which is indicative of distribution.