Gift of the Huge Gap

A market top or just a hesitation?  Clearly, traders opened the gift of the huge gap up open yesterday ringing the resister to protect profits.  Amid all the speculation that this was a market top lets remember that one day does not make a trend!  While it’s true, the market appears stretched and could benefit from a rest or pullback don’t expect the bulls to give up that easy.  There are several very big earnings reports today that could move the market, and I think most are expecting positive results.  Will it be enough to support this lofty market level is the question?  Higher volatility is likely as battle lines develop between the bulls and the bears.  Market sensitive is also likely as we move closer to a federal government closure unless Congress can get its act together.  The road ahead could have big potholes so make sure you have a well thought out plan.

On the Calendar

The Wednesday Economic Calender gets going at 9:15 AM with the latest reading on Industrial Production numbers.  Forecasters see industrial production rising 4.0 in December with total capacity utilization moving up to 2 tenths to 77.3%.   At 10:00 is the Housing Market Index which consensus is calling for a very slight for January to 73 vs. Decembers 74 reading.  Then at 2:00 PM, the Beige Book, comes out which is a report on economic conditions used at FOMC meetings.  We have three Fed Speakers today at 3:00 PM and 3:15 PM and finally 4:30 PM.  The report on Treasury International Capital which tracks the flow of financial instruments in an out of the U.S is released at 4:00 PM.

On the Earnings Calendar, we have 30 companies expected to report today, and several of them could be market moving.  Before the bell, we have GS, BAC, SCHW, FAST and USB.  After the bell, we will hear from, AA, FNLC, HBHC, and KMI.

Action Plan

Yesterday traders remembered the sell button location on their brokerage platforms taking advantage of the huge morning gap.  All four of the major indexes managed to set new record highs before selling began with the DIA breaking above 26K briefly.  As spooky as it might have seemed let’s keep in mind that a one-day pullback does not a trend make.  In fact, at the close of the day, all the major indexes are still above their rising trends.  What will be very important is if a follow-through day so selling occurs.  However, as I write this, the Dow futures are pointing to gap up of more than 120 points suggesting the bulls are prepared to fight.

Keep in mind; we have a bunch of big earnings report this morning that could move the market substantially before the market open.  Yesterday turned out to be one huge whipsaw, and I would not be at all surprised increased volatility continue for the next several trading days.  Price action around market highs can experience very fast reversals in either direction.  Also, remember the market could react sharply on the washing spin as we approach a federal government closure if a budget bill deal passes.

Trade Wisely,

Doug