Morning Market Thoughts

Good morning. Another flat open as stocks continue to mark time into the earnings season. As noted last night, the small- and mid-cap stocks underperformed yesterday, and that indicates a narrowing of buying interest. When traders are optimistic, they will be active in the smaller companies. Not necessarily to the detriment of the larger companies, though that has also been noticeable lately. But when you see a strong rally turn into a flat trading range that may be a top–but also may be a mere resting/profit-taking phase before the underlying rally reasserts itself–we should look to the smaller stocks for a sense of the degree of enthusiasm among buyers.

If the smaller stocks are strong, then the likelihood of further upside is good. They are “confirming” the bull market. But if smaller stocks are lagging, then the uptrend is suspect. They are not confirming the bull market.

So let’s review the widely followed indexes:

S&P 500: coiled near the top of the range. Bullish.
Dow Industrials: coiled near the top of the range. Bullish.
Nasdaq Composite: Hitting all time highs. Very bullish.
Dow Transportations: More than 5% below the December high. Not bullish.
S&P Midcaps ($MDY): Down 2% from highs after printing a lower high. Still above support, but we’ve seen three distribution days. Not bullish.
Russell 2000 small caps: Down 3% from the December high and testing support. Three distribution days. Not bullish.

So, you can see that it’s a mixed bag. We are still in consolidation, but the outcome is not a foregone conclusion. Financials are extended after very impressive rallies. Metals & Mining stocks ($XME) ran 25% but they have now entered a consolidation phase and are testing the 50-day moving average. A breakdown in metals would be a bad thing.

What does all this mean? To me, it means that this is not a time to be aggressive in trading. Rather, it is a time to hold on to the stocks you own and allow them to rest. Give them a chance to continue moving higher rather than looking at any little decline as an indication that the stock is going to fall. Spend some time studying the market. Grab a book if you have time and read a chapter on trading. Any book will do — you can always learn something from any book on trading. Some are better than others; but they all have something for you. Spend some time going through the many tutorial videos on our website. All you do is press “play”, and you’ll learn something new.

Invest in yourself in the same way as you invest in the market. You buy stocks because you think they’ll go higher. You invest in yourself because you think the investment will result in you making more money. So either way, you’re making a good trade. A rising stock makes you money. Gaining more trading knowledge makes you money.

That’s a win:win.

See you in the forum.


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