Since our July update, the S&P 500, NASDAQ Composite, and the DJIA have moved up towards the high end of their trading ranges and appear to be making an attempt at new highs. This surge has been led by the NASDAQ 100, which scored an impressive new high on Friday, July 17th. Unfortunately, even if the other major indexes do make new highs, they will be short lived because the number of stocks making new highs is decreasing – a troublesome fact. The NASDAQ 100’s new high is due to its huge 38% concentration in a handful of the popular large cap technology stocks like Apple, Google Microsoft, Amazon, and Facebook. In order to feel strongly about a meaningful move higher, you would generally like to see a great number of stocks making news highs in a variety sectors. This market has neither of those ingredients.
My observation last night while analyzing over 1000 individual chart patterns was that many stocks finished the week unchanged or lower, which also confirms that any new high will be short lived. On the flipside, this is not to suggest that the market is poised to fall off a cliff. The most likely scenario is that we are likely to see a minor pullback from recent highs, not the beginning of meaningful decline. At this point we would use this expected setback to initiate new positions in leading sectors. The healthcare sector has returned to favor after a brief period of consolidation driven by the biotechs. Computer software remains attractive. The Regional Bank sector has also emerged. Oil and energy sectors should be avoided. Resist the temptation to chase overly popular stocks and stay on course.