Leaders Index 12-29-17

The market closed out 2017 on a down note. The major averages opened higher, but saw their highs in the first five minutes of trading. They then began selling off, and some strong late selling saw all the major averages finish at their intraday trading lows. The COMPQ closed with a loss of .67% while the SPX declined .52%. The greatest weakness was in the semiconductor stocks as the SOX fell 1.05%. Volume was higher across the board yesterday. This is unusual on the last trading day of the year before a three day holiday weekend, but very light volume on Thursday made it an easy comparison. Much of it was also likely caused by some yearend window dressing by institutional portfolio managers. Whatever the reason it was enough to produce fresh distribution days on all the major averages. Leading stocks were lower as well with the leaders index falling 1.01%. The index closed near its lows of the session, showing that there was little buying interest as prices fell. The index closed below its 50dma as well as all the short term moving averages. It has been playing with the important 50dma for a couple of weeks now, which is not encouraging. There has been some rotation out of quality growth stocks in the last couple of months into more value oriented and financial stocks. I will likely try to put together a new leaders index next week to more reflect this new leadership, as the current index is lagging. 2017 was the best year for the market and canslim related stocks since 2013. There were more solid gains in individual stocks than we have seen in a long time. We are now in the time when you start to see a lot of predictions about what 2018 will look like. Some are based on solid research while others are not. All are, however, simply predictions. We are now in a cyclical bull market that started in March of 2009 and in three months will be nine years old. This is, I believe, the longest cyclical bull market there has ever been. It has been elongated by massive amounts of money printing by central banks all over the world in the form of QE. We have also seen interest rates go to zero and even negative in most major financial centers. Some of this is being wound down, particularly in the United States, but it is still going full steam in other parts of the world. When trillions of dollars a year is being pumped into the system a lot ends up in the stock market and it makes it hard to have a meaningful correction in the market. Personally I would like nothing better than to see a real bear market in 2018 that would provide a reset and set the stage for a new cyclical bull market. Experienced market operators know that the best gains are made early in a bull market, although there can be blow off periods at the end of cycles that can also be profitable. Making predictions about future market action is a difficult process that more often than not ends in failure. My prediction for 2018 is the same as my prediction for 2017, I don’t know. The best way I know to handle this situation is to use the three road scenario, developed by my friend Ian Woodward. You look at the market and say what will happen if there is a bull situation. This is the high road. You then look and say what will it look like if there is a bear situation. This is the low road. The middle road is basically the market just going sideways. You then let the market tell you what it is doing and you respond accordingly. This is the best way to operate and allows you to keep an open mind about market action and not fall in love with any one view, which can get you in trouble. I hope everyone has a happy New Year and that 2018 is a profitable year for all, be it on the long side or the short side. Jerry