Stock Market Early Morning Insights – December 13, 2016

Yesterday we saw some weakness in the SP 400 mid-cap, the SP 600 small-cap indexes, and the NASDAQ composite. The DJI did not show weakness and closed at a new high on the strong move in JNJ, one of the three stocks I mentioned yesterday in the Healthcare Sector.

Because the DJI is the most closely watched index by the public and the media, even though it contains only 30 stocks, the buy side financial community wants to close the DJI above the 20,000 level by the end of the year. This will generate massive amounts of media coverage, and the publicity should attract more money into stocks, or at least that is what the theory is.

Those of us who have been around for many market cycles have seen similar situations before, and they do not end well. We just don’t know when that will happen. Idle cash is what drives new purchases, and if margin debt is high, and it is getting there, buying power stalls, and the sellers take over. If selling is intense, panic sets in after the indexes have given back much of their gains as latecomers to stocks try to preserve some of their capital. I am not predicting this is will happen soon, but it will, because it always does.

Yesterday was a mixed day for stocks. The Bank stocks, which have been so dominant, eased a bit yesterday. The SPDR Bank ETF, the KBE was off 1.6%, and the KRE, the Regional Bank ETF was down 1.9%. In the industry group Warehouse view, the Bank index fell all the way to #40 from #2 based upon my demand combo. It has been near the top of the list for days.

If you look at the Spectrum Analyzer images of the industry groups and compare them to the prior day, you will see a dramatic shift in sentiment. Also, the Top 50 GIR shows a mixture of industry groups; not the dominance of bank stocks like we have since the election. One day doesn’t mean much, but yesterday was the first sign that rotation may be occurring.

Energy stocks did well on the back of higher oil prices, and more conservative groups such as REITs and Utilities did well as the VIX spiked 7.6% to close near the top of its daily range.

Stock index futures are up this morning so today’s close should give us a better feel for market direction. The close is the most important part of the trading day, and most indexes were down yesterday. On the positive side, the NASDAQ composite bounce off support to hold near record highs.

STOCK MARKET EARLY MORNING INSIGHTS

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