The much better-than-expected employment report helped the stock market rally nicely again on Friday. (The ISM number was lower than the consensus estimates, but the number was still higher than the previous month’s data, so it was not enough to negatively offset the bullish employment data.) The 1% rise in the stock market came on solid volume (3.2bn shares), but breadth that was fairly mediocre. (It was less than 3 to 1 positive on the S&P 500 and 3.6 to 1 positive for the NYSE Composite. Those #s are fine, but they’re still pretty low for a day when the market rallied 1%.) That said, the NYSE A/D line is making new highs, so it’s impossible to say that the breadth in the stock market is diverging right now. The very worst you could say is that breadth’s trajectory is flattening out a little bit.
Last week’s really in the stock market is taking it into overbought territory. This condition is not extreme, so we don’t want to overstate this situation. However, it does bring us back to the comments we’ve been making recently about the stock market being at a “critical juncture.” What we’ve been saying is that a “breakout” from these levels would be quite bullish…but that a “failure” at these highs would be negative. This is still true, but this situation is not going to be resolved over 1 or 2 days. It could take a little bit of time.
The reason we say this is because the best case scenario right now for the bulls…given that the market has become somewhat overbought on a near-term basis…would be if the stock market took a short-term “breather.” In other words, with the market reaching an overbought condition, it’s intermediate-term upside potential will actually be greater if the market pulled-back 2%-3% (and worked-off this short-term overbought condition)…AND THEN broke above its old highs in a more meaningful way. This kind of action would allow the stock market to rally in a more powerful way later in the year…because it would keep it from getting extremely overbought on a near-term basis later this month. (I hope that makes sense the way I explained it.)
Of course, just because this would be the best case scenario for the bull heading into year-end, it doesn’t mean that we’ll follow that scenario. However, one of the reasons we raise this potential move is because if the stock market does indeed fall by a few small percentage points at some point in November, it will NOT mean that the market has “failed” in its attempt to breakout. In other words, we’ve been saying recently that we need more upside follow-through to confirm a breakout in the market…BUT we ALSO want to say that any breakdown from current levels will have to be pretty strong for it to confirm that stocks have failed to breakout once again. Therefore, a “sideways correction” (or even a a mild pull-back for that matter) would not be a bad thing at all.
Moving to a different asset class, we’d like to highlight that natural gas is making a “higher-high” this morning…which has given the commodity its first “higher-low/higher-high” sequence of the year!!! We’d also point out that it’s making this move after already having broken above its trend-line from late last year…and broken above its 200 DMA (which provided tough resistance back in September)!......We do admit that it is getting overbought on a short-term basis (2nd chart below), so we’re definitely going to have to see more upside follow-through before we can confirm a change in trend for nat gas. This means that (just like it might be with the stock market) Nat Gas may have to take a very-near-term “breather,” but there is no question that this commodity breaks higher soon (either immediately…or after a near-term “breather”), it’s going to have a lot of upside potential…at least on a technical basis.
Again, we have to wait for confirmation that the breakout has actually taken place before we raise a green flag on natural gas, but looking at the charts on some of the energy equities with large exposure to nat gas, COG looks the best to us. It has broken above its multi-month trend-line from May…and has made a nice “higher-low”. Therefore, if it can follow that “higher-low”…with a nice “higher-high” (above $19…its highs from September & October), it’s going to be quite bullish for COG on a technical basis. (Third chart below.)
Finally, here is the stat of the day: We heard this morning that the difference between the estimates for the highest valuation on Aramco and the lowest valuation…by the banks involved in the deal…is equal to the total market cap of Apple Computer! Unbelievable!!!!!!!
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Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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