Markets in Brief Summer Bloom

This column was originally published on RealMoney on July 3 at 8:09 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

I had expected a sharp rally from a negative and oversold environment, but what we got Thursday was more than I expected in one day. The Federal Reserve spoke, and the market shot up like a rocket. It's amazing how the market appears ready to fall off a cliff one day and is saved the next by one news event.

I've been asked if this is the follow-through day that I've been talking about. It is a follow-through day if you are looking at the percentage the market was up. However, if you go by William O'Neil's research, a follow-through day should come on the fourth through seventh days after the first significant rally. This rally came on the 12th day.

Does that count? Yes it does, but rallies after the seventh day lead to weaker moves. You also have to consider several other catalysts here. First, you have investors betting that the Fed is done raising rates. Then you have month-end and quarterly markups by funds. Next, there was panic short-covering and, finally, hedge fund money rushing in for some action. Regardless, it's price first, then volume, and they were both there.

Those ingredients propelled the market up over 2%. Whether this move holds or fails, you still need to execute proper money management. I'm skeptical that this is the start of a new leg up. I'm still in the camp to take profits when your indices or stocks hit major resistance. If it's the start of a renewed bull move, we'll get further confirmation.

A renewed bull market will come with these characteristics:

  • We will get clear new leaders breaking out to new highs on significant volume.
  • Those leaders will successfully pull back and test their breakout points and then start to move higher.
  • The market will start consolidating and pull back on low volume, then move higher with renewed strength.
  • Advance/decline numbers will dramatically improve.
  • New highs will consistently outnumber new lows.

Buying a one-day wonder isn't proper money and risk management. Most stocks are coming off of weak V-bases, not solid consolidations.

I have always said, don't be a bull and don't be a bear -- be an opportunist. That means listening to the market, not to market pundits. Until we get a clearer picture, here are a few ways to handle Thursday's action.

If you are heavily long, look to take some profits as indices or stocks move into resistance or tighten sell stops, especially if they are moving up on lower than normal volume. Sell your weakest and most volatile positions to reduce risk. Finally, look for low-volume pullbacks on new leading stocks and start positions in them if the above market conditions are met.

If you're net short, tighten up your stops to cover if your positions continue to move against you. Add a few leading stocks after they pull back, and start to move higher to hedge your positions.

If you are holding a large portion of cash like I have been suggesting over the past few months, then I would wait on adding any new positions until we get further confirmation that the summer rally is going to hold.

From a seasonal point of view, this rally is right on time. The Stock Traders Almanac shows that a midyear rally usually begins at the end of June through the middle of July.

However, it also states that summer rallies are the weakest of all the seasonal rallies.

Let's take a look at where major resistance resides on the charts.

The NYSE Composite Index made a powerful move in increasing volume above the 200- and 50-day moving averages, aborting the recent downtrend. The first level of resistance is in the 8,300-8,400 area. If the index can break through this area and consolidate, it may have a chance to move to new highs.

However, I doubt that will happen this time around. Carefully watch for it to roll off of any of these resistance levels -- that will be your signal to exit longs or tighten stops.


The Nasdaq 100 Trust ( QQQQ) just can't get out of its own way. Even after Thursday's strong move, the index remains below the 50- and 200-day moving averages. It looks like the $40 area will be formidable resistance.


Source:

It is a well-known fact that semiconductors and technology must be leading for a strong bull market to exist. The current chart of the Philadelphia semiconductor index isn't what you want to see. Short-term resistance is in the 460 area, and major resistance is at 480-490.


The transport sector has been one of the strongest areas of the market, and I expected that these stocks would show leadership when the correction ended. As you can see, they broke through resistance right on cue.


The small-caps made a powerful move Thursday, but they have a long way to go to regain a leadership position. The 380-390 area in the S&P 600 Small-Cap Index will be a tough wall to crack.


Source:

The iShares MSCI Emerging Markets Index Fund ( EEM) was looking as weak as the semiconductors last week. It made a tremendous move from its oversold condition Thursday and made it back to its 50- and 200-day moving averages. I believe the odds are fairly low for the ETF to get above the 95-100 area. If it does, I will re-evaluate it.


I liked the recent consolidation in the CRB and thought it looked ready to move higher. It moved back above the 50-day moving average Thursday. Commodities companies should have very good earnings this quarter, and that could propel then back to a leadership position in the market.


The same goes for the energy sector. I don't like the V-shaped move so far in the Energy Select Sector SPDR ( XLE), but if the energy sector consolidates, the stocks should do well as earnings start to roll in.


If the market can hold most of its gains over the next few days, we'll have a chance to gain a few more percentage points. The market also has strong seasonal support, and earnings should be robust for most industries.

However, I still believe the four-year presidential cycle will play out here. That would lead to another correction with a good buying opportunity in the fall of this year. The short-term trend is up for now, but I'm not sure that it will last more than a couple of weeks.

P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
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Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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