-- Weekly Market Summary --

Big Mo Approaches - This Market May Be
Starting a Momentum Run

By Joe Duarte for September 5, 2017

If you were to build a wall of worry for the stock market to climb, the current scenario fits the bill - nearly perfectly. Just as the bullish robot traders decided to follow the usual “buy the dip” script last week and the market showed a moderately credible bounce, North Korea decided to run a nuclear test and to announce it has an ICBM capable hydrogen bomb available for use. At the same time hurricane Harvey devastated Houston, and hurricane Irma may deal the U.S. east coast a devastating blow in the coming few days. Meanwhile, just to make things interesting, Congress is due back in town with the potential for a government shutdown looming as the fight over the debt ceiling is due to start.

I’ve been bearish for the past few weeks, but have also noted that with the robots running the asylum, yet another dip buying rally with possible new highs was not out of the realm of possibilities. Indeed, that’s what happened last week with the robots following classic technical analysis rules based on moving averages, overbought and oversold oscillators, plus a healthy dose of fear registering on the CNN Greed and Fear Index as hurricane Harvey dealt havoc to the South Texas coast.

So, if I were a cynic and the robots were to follow the script as they have over the last year, we should see even more new highs as the market climbs the proverbial wall of worry. Of course, there is no certainty that this will happen, given the reality of the damage caused by hurricane Harvey alone, not to mention what may happen on the east coast in the next few days if hurricane Irma hits. So if North Korea does indeed launch an attack on the U.S. I would be very surprised to see the Dow Jones Industrial average break out to new highs; which leaves Congress as the wildest of wildcards in the mix. Enough said.

New Highs on NYSE Advance Decline Line

All we know is history. But at least history was good last week, as trading action ended with new highs on the NYSE Advance Decline

blow in the coming few days. Meanwhile, just to make things interesting, Congress is due back in town with the potential for a government shutdown looming as the fight over the debt ceiling is due to start.

I’ve been bearish for the past few weeks, but have also noted that with the robots running the asylum, yet another dip buying rally with possible new highs was not out of the realm of possibilities. Indeed, that’s what happened last week with the robots following classic technical analysis rules based on moving averages, overbought and oversold oscillators, plus a healthy dose of fear registering on the CNN Greed and Fear Index as hurricane Harvey dealt havoc to the South Texas coast.

So, if I were a cynic and the robots were to follow the script as they have over the last year, we should see even more new highs as the market climbs the proverbial wall of worry. Of course, there is no certainty that this will happen, given the reality of the damage caused by hurricane Harvey alone, not to mention what may happen on the east coast in the next few days if hurricane Irma hits. So if North Korea does indeed launch an attack on the U.S. I would be very surprised to see the Dow Jones Industrial average break out to new highs; which leaves Congress as the wildest of wildcards in the mix. Enough said.

New Highs on NYSE Advance Decline Line

All we know is history. But at least history was good last week, as trading action ended with new highs on the NYSE Advance Decline line. Under normal circumstances this would be a sign of further gains ahead, since this is an indicator of a market with positive money flows. But, of course, these are not normal times, so the path forward is uncertain.

Nevertheless it was a clean, new, textbook high on the NYAD, with the ROC indicator moving back above the zero line and the NYAD moving well above its 50-day moving average after finding support at the lower Bollinger Band the prior week– just the way the robots like it and are programmed to execute. Similar patterns can be appreciated at the November 2016, and the March, and June 2017 lows.

Fairly Credible Action in the S & P 500

And just as the NYAD made a new high, the S & P 500 (SPX) also delivered a fairly credible performance last week, although it did not deliver a new high as did the NYAD. This may become a significant event. Despite that, three positive things did happen to the index: 1) On Balance Volume (OBV) improved significantly. 2) Accumulation Distribution (ADI) steadied. And 3) The ROC line moved back above zero, suggesting an improvement in momentum to the up side. When taken together, what emerges is a pattern of money moving into the market with more than just a little conviction. Still, SPX may not be totally out of the woods here, and we may see some down side action in the next few days, especially if volatility rises.

Game On: Biotech Breaks Out

The big news of the week was the breakout in the Nasdaq Biotech Index (NBI) on news of the FDA approval of a new gene therapy treatment which may become a major cog in the fight against cancer. The price tag of over $400,000 per treatment didn’t seem to stop anyone from buying biotech stocks, with the 3450 level on NBI now becoming an important support level for the rally. I would expect a few days of backing and filling here, but if biotech trading history is any clue as to the future, we may see several more weeks to months of higher prices here, especially if companies start to buy each other out, which is not out of the unexpected range at this state of the cycle. Subscribers were able to get in on the biotech trend early last week as my indicators flashed a buy signal.

Construction Materials Roar

The market also priced in a lot of federal money to rebuild Houston, as the Dow Jones U.S. Construction and Materials Index (DJUSCN) put on a quite a show last week after the pictures form the Houston disaster became widely disseminated. I’ve been constructive on this sector for some time and subscribers of In the Money Options have already been well rewarded here. But there may be more on the way, especially, if hurricane Irma delivers a similar blow to the east coast of the U.S. Of course, no one wants another calamity, yet from an investment standpoint, the possibility of such an event must be considered.

The materials rally still has the potential to deliver a move on the DJUSCN back to the top of the recent trading range, some 4-5% above the closing price on September 1. A move above the 50 and the 200-day moving averages would be very bullish for this sector at the moment.

No Time to be Paralyzed by Fear

I acknowledge that these are difficult times. Yet, managing investments requires a pragmatic mindset. So from an investor’s viewpoint, despite the mother of all walls of worry being in place, this is not a time to fret or worry. Instead, it’s a time to be disciplined and observant, to be honed in on the daily trading action and what I expect will be another attempt to increase volatility by robot traders who will be reacting to headlines about North Korea, the U.S. debt ceiling, and hurricane Irma. Contrary to popular belief, though, volatility often creates opportunities, which is why paying close attention to the daily developments and attention to managing risk is the order of the day. Stick with what’s working; consider taking profits on big winners, and look for new opportunities as they present.

 

 

















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