The market continues to act just fine. Don't let the naysayers get you down.
Do major averages look extended and overbought? Absolutely, but with everyone seemingly calling for a market pullback at this point, stocks could keep right on going.
It's hard to believe, but the Dow could drop 558 points from Thursday's close to its 50-day simple moving average (SMA) and it would only be a pullback of 4% or so -- fairly tame considering the blue-chip index is up 11% since hitting a low of 12,471 in mid-November. A pullback of 3.7% for the S&P 500 would take it down to its 50-day line. For the Nasdaq Composite, only 3%.
It would take a daunting headline or two for major averages to come down to their respective 50-day lines but it's certainly not out of the question. And it wouldn't be a bad thing, either, because it would give leading stocks a chance to catch their breath after big run-ups. A market pullback in generally light volume would be more preferable to one in heavy volume.
Indeed, extended stocks outnumber those still within buying range by a wide margin. There's nothing wrong with being on the offensive during a market uptrend, but be careful not to force the issue now by buying too late.
Many high-quality growth names have moved a lot already. The market served up a bunch of technical breakouts on January 2 when indices surged in heavy volume. Instead of looking for stocks poised to break out from consolidation areas, focus on stocks showing bullish price and volume action post-breakout. Names like Celgene (NYSE: CELG) and HCA Holdings (NYSE: HCA) continue to show great action after recent breakouts. Both continue to trade tightly, a sign of strength and support.
The financials still look good here, particularly asset managers like Blackrock (NYSE: BLK) and Raymond James Financial (NYSE: RJF). Goldman Sachs (NYSE: GS) and J.P. Morgan Chase (NYSE: JPM) continue to show relative strength, but the common bond among all four stocks is that they're too far extended past proper buy points.
Don't chase them here. A better strategy would be to wait for a market pullback. When it happens, each stock will likely pay a visit to its 10-week moving average. During market uptrends, the strongest stocks tend to find support at their 10-week lines.
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