The market continued to advance this week, leaving the Dow and S&P at record levels. The advance occurred despite the ongoing concerns in the subprime market and the economy.
The S&P 500 advanced 22.06 or 1.4% to finish the week at 1552.50. The Dow gained 295.57 or 2.2% to 13907.25 and the Nasdaq also finished the week higher, up 40.49 or 1.5% to 2707.00. The Russell 2000 climbed 3.46 or 0.4% to 855.77.
The advance pushed my technical indicators into extreme territory, particularly in the higher-beta indices such as the Nasdaq 100 (QQQQ). Typically, this type of reading limits upside advances and often leads to a short-term (1-5 days) pullback.
All of the major indices are now at an important juncture as they have managed to push slightly above what has been strong overhead resistance. A move below these levels could stir up the bears and cause a wave of selling, but how long the selling lasts is another question.
July is historically the best month for the Nasdaq. The start of the second half brings in retirement funds, etc. Furthermore, the Nasdaq’s 12-day mid-year rally begins in late June and conveniently ends on July 13th, last Friday. According to the Stock Trader’s Almanac the average gain for the 12-day mid-year tech rally is 3.2% versus the 0.1% for July as a whole. Moreover, the Almanac states to watch for “huge market gyrations” after July 4th “both up and down”.
The Almanac goes on to mention that “in the mid-80’s the market began to evolve into a tech driven market and control in summer shifted to the outlook for the second quarter earnings of technology companies.” As a result, the Nasdaq’s 12 day mid-year rally from the end of June through mid-July is the strongest.
This year the 12-day rally began on June 28th and as I stated earlier, ended Friday. QQQQ, the proxy for the Nasdaq 100 opened up at $47.52 on the 28th and ended the 12 day mid-year rally today at $49.90, for a gain of 5.0%. So, it looks as though the tech’s mid-year rally held true and if the historical precedent continues then the market should begin a major slowdown, at least for a few weeks. The next seven trading days are historically very weak. Couple the seasonal weakness with the current overbought situation and a flat to lower price action looks likely. So I would be hesitant to jump on the bull’s bandwagon at least for the next few weeks.
I found it interesting that the talking heads on CNBC neglected to mention the historical mid-year expectations. Not once during the rally did I hear of the 12 day mid-year rally that is stated in one of the most prominent texts among traders, not once!
With that said, I do expect to see the ”summer doldrums” take over next week and the major benchmarks move back into the trading range that it has established over the last few months. As I have said for months now, expect a trading range with slight expansion. We saw the slight expansion occur this past week; now expect the market to move back within the established trading range and continue to trade sideways.
The strong move has pushed the underlying SPX closer to the short call strike in our Iron Condor strategy, however, we are still comfortably within our range. This goes to show just how powerful this strategy can be because with a 160 point range, the underlying SPX can vacillate wildly and yet the strategy is still profitable. I do think that a dip in the S&P might bring an opportunity to take the position off, so I will look at that when the opportunity presents itself. There is no need to risk testing our short call strike during option expiration week. Even if we take off the trade for say $.20 the strategy will still make over 10% for the July expiration cycle.
As I have stated over the past few days, the strategy is nearing capacity so if you wish to participate please join soon as we expect to be full by the end of July expiration. More and more people are moving into the strategy so please reserve a spot before it is too late. We intend on staying small because large groups groups leave large imprints which can often cause subscribers problems getting in and out of a position. Since we are dedicated to limiting the subcribers to our newsletter this will never happen with our service.
If you wish to join click the following link:
http://www.crowderinvestments.com/amember/signup.php?price_group=-7
Overbought/Oversold levels for July 13, 2007
- SPY - 73.8 (overbought)
- DIA - 79.7 (overbought)
- IWM - 65.0 (neutral)
- QQQQ - 84.7 (very overbought)
- GLD - 76.1 (overbought)
- OIH - 55.7 - (neutral)
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Have a great night!
Andrew Crowder, Chief Investment Strategist, www.crowderinvestments.com