This market is testing us, testing our belief in this bull market. And it’s reminding us that investing isn’t easy. I believe investing is simple, but not easy- there’s a difference.
Today we’re going to rifle through some of the signals Mr. Market is sending out to those who are interested in what he’s saying as opposed to what all the noise out there is saying.
So where are we at now with this market? Did that ‘double-support’ area I mentioned last Thursday hold, and what comes next?
This will be an important week for the market because it sits on a cliff edge, this is the area of support I described last Thursday. If a strong support area breaks, it’s a very ominous sign. But if it holds and makes the market bounce, that will be very positive.
Here’s a chart of the Dow currently:
The horizontal blue line I drew is the support area, and the market appears to be consolidating and holding there currently, although last Friday it certainly took a peak over the edge before turning back.
Look at the CURVY blue line- that’s the widely-watched 50 day average price. What we really need to see now are the markets (Dow and S+P) climb back above that line ASAP! The more time they spend below it, the more investors will start to sell.
But as I look at that chart I realize that things may not be that bad. Bear with me as I explain…
Look again at that blue line of support that I drew. It’s around 15,700. The area below it is where the Dow is priced down to around 14,800 in a channel below the current one, so there’s about 900 points under that support line. Above that support line there’s another 900 points as the Dow broke up into the new higher channel around mid-November 2013. So things are in proportion…
It’s easier if I zoom out of the chart a bit:
Can you see? This could easily be just another pullback as the Dow continues its march upwards. It’s just that this pullback happened a little fast. But overall, there’s a sense of proportion to this advance when you see the bigger picture.
Another reason why I think this market is stronger than many are noticing goes back to something I said here on January 13th:
“So, we party on, but selectively. We need to look at the areas of the stock market that are still spawning rising stars, stocks that still have a lot of gas in the tank, AND are less susceptible to the economy.
What I didn’t mention was which was the best performing industry group of the last six months, and the answer is healthcare stocks.”
Here’s the XLV, a basket of healthcare stocks- look how resilient it’s been in the recent shake-out, and how it’s holding ABOVE that blue 50-day price line:
The market sector leaders like healthcare and finance should tell us what happens next. And in terms of strength, both are rising.
The retail sector on the other hand is another story, so it’s a mixed bag to be fair. I won’t show that chart here, but it isn’t looking pretty.
Anything can happen, but barring anything unforeseen and depending on the conditions I’ve outlined here, I see the odds favoring that the market moves higher from here. But stay selective on the industry groups that you’re buying.
Best,
Jim.
