Stocks for the most part eked out modest gains this week as volatility remains dormant. For the week, the Dow Jones Industrial Average (chart) finished up 0.26%, the Nasdaq (chart) +0.41%, the S&P 500 (chart) +0.33% and the Russell 2000(chart) actually ticked down less than a quarter of a percent.

The S&P 500 (chart) did manage to close at its highest level in almost four years, however, oil keeps creeping higher as well and closed at almost $110 a barrel. If oil continues its upward trend, this could be the one catalyst that begins to put the brakes on this multi-month bull market run we have witnessed. The payroll tax cut extension will help off-set rising gas prices but I don’t think anyone wants to see oil prices climb higher or gas prices at $5.00 or $6.00 a gallon.

Everyone from economists to technicians have been proclaiming that the market is due to pause, that it’s overbought and needs a retracement. Well if oil trades above the $120 mark in the near future, we may just get what the pundits are predicting.

Have a good weekend 🙂

~George

This is beginning to sound like a broken record and the bulls like what they are hearing. Once again stocks closed the week up across the board. On the week the Dow Jones Industrial Average (chart) + 1.16%, for the year the DJIA is up almost 6%. The Nasdaq (chart) finished the week up 1.65% and for the year the Nas is up a whopping 13.31%. The S&P 500 (chart) closed the week up 1.38% and so far this year the S&P is up 8.24% and last but not least, the Russell 2000 (chart) finished the week up 1.89% and for the year the Russell is up a stellar 11.84%. This has been one of the best starts coming out of the gate for the stock market in decades and there doesn’t appear to be too much getting in its way.

Market technicians including myself have been expecting a pullback to occur and have been citing “overbought” conditions for weeks now (blog). However, these markets remain incredibly resilient and are seemingly poised to go higher. I am remaining cautious as to how much longer this incessant bull run will continue and will look for additional clues as to when the inevitable retracement will occur. There were a lot of traders and investors who missed this enormous bull run over the past few months. What kept many investors on the sidelines was and is the on-going debt crisis in Europe and what has caught many investors off guard, is the stronger than expected flow of economic data here at home.

That said, there are now a lot of traders and hedges funds licking their chops on short side opportunities in this overbought market. However, a short strategy is incredibly risky and requires an enormous amount of experience to execute successfully, so let’s see if this time they get it right.

Have a great holiday weekend 🙂

~George

Last week marks the first time this year that the key indices retreated, albeit modestly. The Dow Jones Industrial Average (chart) fell 0.47%, the S&P 500 (chart) -0.17%, the Nasdaq (chart) 0.06% and the Russell 2000 (chart) lost 2.14%. Still for the year these bellwether indexes are up sharply.

So why the pause? For the most part the pundits want you to believe that the Greek debt crisis is the reason. That in part may be true, but hardly anyone seems to be talking about how the markets appear to be a little exhausted and looks to be topping out? Let’s take a deeper look. One of the things I look for over and above the Relative Strength Index on stocks and indexes is market sentiment. There is extreme optimism in the markets right now with seemingly all of the headlines pointing to a bullish thesis. Also, there are a plethora of analysts coming out and raising their target prices on indexes and equities which can be construed as another indication of a topping pattern. Even BlackRock’s Larry Fink was recently quoted as saying “be 100% in stocks”.

Historically speaking, when you have the key indices and equities trading above the 70 and 80 value levels on the RSI, and you have market sentiment at extreme levels as we have today, a respectable pull back may be in the offing. Now if you add the continuing uncertainty of the European debt crisis to the mix, especially with Greece, this could cement the much anticipated retracement certain investors and traders have been looking for. Whatever the case is, it’s usually a good idea to lock in gains and make sure to use protective stops in your trading strategies.

Good luck to all 🙂

~George

Stocks took off out of the gate this morning on the heels of a better than expected jobs report. The headline unemployment number fell to 8.3%, its lowest level in three years. This propelled the major averages to multi-year highs. So far this year, the Dow Jones Industrial Average (chart) is up over 5%, the Nasdaq (chart) is up a whopping 11.54%, the S&P 500 (chart) +6.94% and the small cap index Russell 2000 (chart) is up an astonishing 12.17%. This is no typo and yes, these gains have occurred in a little over a month’s time.

Let’s look at the technical perspective of the markets and see if this current bull run will continue uninterrupted. In one of my January posts I referred to a technical indicator call the Relative Strength Index or the RSI. This indicator tracks oversold and overbought conditions and is used by a variety of market technicians as part of their analysis when evaluating current market conditions. As of the market close, all of the key indices and in particular, the Nasdaq (chart) are now in overbought territory with the Nasdaq (chart) on the cusp of the 80 value level – a level not see in over a year.

So what does all of this mean? Well, markets or stocks can be overbought and remain overbought for extended periods of time. However, historically when RSI levels are as elevated as they are today, especially with the indexes, be very careful about jumping on this bull freight train. I would expect a pullback, which actually would be very healthy for the markets, then hold at support levels and continue its uptrend. I am not suggesting that any of this will occur, I am merely pointing out that it would be prudent to allow the markets to take a breather before considering any additional long strategies.

Have a great weekend 🙂

~George