First of all, understand that the market is healthy. Next, you need to understand that it is overbought. Not violently so, but overbought, nonetheless. 70 RSI’s across the board, with stochastic’s in the middle 90’s, is what overbought looks like. It does not mean the market can’t continue a bit higher first, because it can, but 70 RSI and a 95 stochastic warn us that there is an imminent selling episode in the near future. It is what it is.
It feels like we can’t sell much, but you’d be surprised what can happen off a combination of overbought oscillators, such as we have now. It would be normal to have a 3-5% pullback from these types of conditions once the rubber band finally snaps. It would not be unhealthy. It would not be bearish. To the contrary, it would be bullish as it allows for things to unwind to where we can move higher once again.
For now, because the trend is higher, you always have some type of exposure even if those plays take a hit short-term, because you can always stay overbought longer than you think possible. Some stocks can hang in very well based on their set-ups even if the market sells. I would tell you that being fully involved right here carries more risk than we’ve seen lately. But again, some exposure is appropriate. Remember, overbought is not a sell signal. It is a warning that a pullback is coming, but nothing more.
We gapped up today on some solid earnings reports from JPMorgan Chase & Co. (JPM) and Intel Corporation (INTC). Technology and those lagging financial’s got a bid overnight. This riled up the futures allowing for a nice gap up at the open. The market held that gap and gradually raced higher the rest of the day, until those RSI’s reached near 73 across all the major index charts.
That caused a late day selling episode that took stocks well off their highs and the RSI’s back down to 70. Not quite doji’s across the board, but close, which tells us to go easy here. If it had been a perfect doji it would almost guarantee a pullback tomorrow, but it wasn’t quite perfect enough to make that call. However, the late day selling tells us that the overbought conditions will need to be worked off soon. Overall, a strong day for the bulls. Not perfect but that would have been tough with us being overbought.
We did make our way decently above 1160 on this blast today. A close at 1178 is basically one and a half percent in to the clear. A pull back to 11760 would reset things decently, but it would be nice to see that level hold on to any selling to come. It would show willing buyers at critical support that was recently difficult resistance. You always want to see this type of new support get defended with new buyers. I like to see breakouts clear by at least one percent as it allows for room to sell back down and hold.
We got as much as two percent above at today’s highs, thus, 1160 really should holding be on a closing basis on the selling to come. One red flag today was the continued under performance by those financial stocks. JPM, which was up nicely pre-market on their earnings report, finished very red. A nasty candle indeed. Most of the other financial stocks were down as well. Bank of America Corporation (BAC), Goldman Sachs (GS), Morgan Stanley (MS), Wells Fargo & Company (WFC) and JPMorgan Chase & Co. (JPM) were all red.
The market had a great day, yet those stocks did not participate once again to the up side. The under performance continues there for sure. The semiconductors are no longer lagging and this is helping the market, but in time we really need to see these financial’s get going. If not, it’s hard to imagine things holding up all that well. If the financial’s head back down in to a bearish trend, it’ll drag the rest of the market down with it.
The sentiment figures came out as usual today and showed the bullish sentiment is slowly, but surely, coming back in to the market place. Bulls ramped up and bears fell back creating a 225 plus spread. Not bad at all, but now totally neutral. The bullish trade on sentiment is over, but again, it’s not bearish. It’s fine, but no longer a big advantage for the bulls. If we start printing bull-bear spreads in the thirty percent range, then we have to get worried for the bulls, but not at twenty two percent. News can come and bring the market down, but sentiment won’t be a factor at these levels.
Wherever I look I can see 70 RSI readings. This tells me to warn you once again to take it easy here. I didn’t say short. I didn’t say sell everything. I am simply warning you that too much exposure is inappropriate for the moment. I believe we can think about adding longs once those oscillators pull in enough. It never feels like we can sell when things are going higher, but trust me, they can. Be smart. Be appropriate. Day to day here in this overall up trend that will shortly need some selling.
Peace,
Jack
