- Not just a large cap rally
- Large speculators covering shorts on rally
Monday the Dow Jones Industrials index moved to new all time highs. Using PCM’s proprietary trend indicator, 25 of the 30 stocks in that index are in a weekly uptrend. Additionally, 81 stocks in the Investor Business Daily’s top 100 stock index are in a weekly uptrend. It is encouraging to see the IBD 100 stocks, which are generally much smaller yet faster growing companies, participating in the rally. This means that this rally may go further then most expect. Although the market is extended, I look for new highs in the S&P 500 index, upside target of 1,566 to 1,600, before much of a pull back. There could be some seasonal weakness from October 11 through the 26. Once October lows are in, I look for a rising market through year-end.
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Posted by Michael Chapman at 12:00 PM PDT
- Volume is back
- Large Cap Growth leading the way
- Housing situation continues to deteriorate
Last week the major indexes exploded to the upside on higher volume. The DJI and S&P indices were up 3%, but the real story was the 6% increase in Investors Business Daily’s (IBD) top 100 leading stocks index. In that index, 61 of the 100 stocks had weekly increases in both price and volume. The four-day pull back since last Wednesdays high has been on lighter volume each day (bull market trading). I’m betting that by the next time I post we will be at new highs for the S&P 500 and DJIA indexes. The NDX hit a new high Tuesday.
A quick glance at IBD’s mutual fund page shows large cap growth stocks have been the leading stock class since mid June. This group has underperformed since 2000 and is due to cycle back into a leadership position.
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Posted by Michael Chapman at 12:00 PM PDT
- The squeeze is on
- Oil is a concern
I’ve been suggesting since June that the imbalance between the record long position of the commercial traders and the record short position of the large speculators, aka hedge funds, would likely resolve itself with a strong move to the upside as the hedge funds were forced to cover their shorts.
Yesterdays 50 basis point cut in both the Fed Funds and the discount rate is the catalyst for this short covering to begin. We will likely see a quick move to new highs as buy stops are hit and shorts scramble to cover.
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Posted by Michael Chapman at 12:00 PM PDT
- Light volume rally
- Up unless stops are taken out
- Support from international growth, bonds, Fed
Stocks have risen, as suggested in our last postings, but it continues to be on light volume. Heavy institutional buying is still absent. At some point in the not too distant future, the volume needs to pick up or this rally becomes a selling opportunity.
All three stock indexes that we watch have moved back into weekly up trends. Unless they take out their respective stops, we have to give this market the benefit of the doubt and look for higher prices. Stops for the cash S&P 500, Nasdaq 100, and Dow Jones Industrial Average are 1,431,1960, and 13,033 respectively.
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Posted by Michael Chapman at 12:00 PM PDT
