Stocks opened higher on Monday on news thatGreece’s parliament had approved the increased austerity measures demanded by the eurozone in order to secure bailout funds. And with that the markets refocused again on European headlines and rallied. Industrials and banks were strongest yesterday, which from the standpoint of technical analysis is a positive.
At the close, the Dow Jones Industrial Average rose 73 points to 12,874, the S&P 500 gained 9 points at 1,352, and the Nasdaq was up 28 points to 2,931. The NYSE traded 682 million shares and the Nasdaq crossed 419 million. Advancers led decliners by about 3.1-to-1 on both exchanges.
One of the reasons for the recent surge in U.S. stocks was pointed out by Riverfront Investment Group, which gets their data from ISI Group. The good news in theUnited Statesis that for the first time in 35 years, according to Riverfront, manufacturing employment is increasing faster than non-manufacturing employment.
They say that this is likely to continue due to labor costs, energy costs and exchange rates. This trumps any news from a small matter like Greece, and for that reason, they are long-term bullish, viewing any pullback in our market due to an exit by Greece from the European Union as an outstanding buying opportunity.
They go on to say that the U.S. and European banks have already prepared for a default and that “subsequent pain will make Portugal, Italy and Spain more willing to embrace labor reform and deregulation, likeIreland.”
Well, that’s a lot to swallow, but there is no doubt that the banks have been acting better and joining the technology and industrial stocks in the current advance. There is also little doubt that if the violence inGreecebrings down the government, forcing it to exit the European Union, we could see a reaction in our markets that would present an excellent buying opportunity.
Nevertheless, at current levels the financial sector via the Financial Select Sector SPDR (NYSE:XLF[1]), like the indices, is extremely overbought. Perhaps an exit byGreece would result in better values in the financials, and so waiting rather than investing in the group is prudent policy. Currently the group has reached the significant resistance zone at $14.60 to $15.70 where progress should slow.
In Friday’s Daily Market Outlook[2], we quoted one analyst as saying, “Nasdaq is proving that an overbought market can become more overbought.”
I responded that the index’s RSI was at 80-plus. In fact, it was at 80.81 — the highest before that was 80.1 in November 2010, which marked the beginning of a decline. But yesterday’s new high in the Nasdaq is no reason to expect the same from the other indices. Currently all are overbought and chasing them at these levels is probably not wise.
Smart traders will continue to accumulate cash so that they may take advantage of any near-term weakness. A retrenchment of 5% to 8% is likely with downside targets of 12,535 on the Dow, 1,292 on the S&P 500, and 2,834 on the Nasdaq.
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