Now What Part 2

Stock markets continue to ratchet closer to 20,000 on the Dow Jones in the aftermath of the Trump victory.  I am reminded of Al Gore’s famous explanation of Global Warming, “it’s like gravity, it just is”.  In the case of the stock market’s advance, it seems to defy gravity as it just keeps going up.  As the attached chart shows, the Dow Jones, represented here by the DIA ETF has been essentially vertical over the past month.

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Despite my previously voiced concerns, this weekly chart shows the powerful vertical surge post Trump.  I humbly admit, didn’t expect that!   We’ll go out on a limb here and declare that it can’t go to infinity, so we are left to assess the chart pattern and attempt to determine what’s likely to happen next.   A few things jump out at us from this chart.

First, we can see that the huge W shaped double bottom formed a break out at the fulcrum area and then subsequently came back to test this area right at the time of the election. In the aftermath, the vertical rise has reached almost to the levels  projected by an equal measure of the distance from the fulcrum to the base shown on the chart.  With this being the case and with the price having moved so far from our moving averages, the likelihood is high that we’ve achieved the near term price targets.  In our opinion, latecomers considering fresh longs here will be doing so at a technically risky area.

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As you would expect, a similar pattern is traced out by the SPY, an ETF which tracks the S&P index.  We note that the projections are similarly near a short term target zone.  The QQQ, or Nasdaq tracking ETF is quite different:

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Any double bottom pattern here is sloppy at best and the advance, while powerful, doesn’t mirror the vertical moves in the DIA or SPY.  We also note that the momentum histogram is noticeably weaker as we move from the DIA to SPY to QQQ.  This indicates to me the relative weakness in the Nasdaq listed issues.

The divergence in strength between the large caps and the Nasdaq issues is also apparent when we look at the underlying advance/decline statistics on the respective exchanges.  The following is a chart of the weekly advance/decline stats on the New York Stock exchange listed issues: (charts courtesy of Stockcharts.com)

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Note the confirmation of new highs.  In contrast, here is the weekly chart of advance/declines for the Nasdaq issues, showing a significant lag from the peaks being registered by the stock index.

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Clearly this shows that the large cap industrial stocks are where much of the market’s strength is.  We re-iterate our view that the divergences in the market indicators creates a dangerous environment in which to be heavily long stocks.

Finally the following chart, while having nothing to do with stocks, is interesting to keep in mind.

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