Big Gains to Start the Year

The NASDAQ index gained three percent on Wednesday to start the new year off with a rally. The resolution orĀ appeasementĀ of the fiscal budget for the next sixty days brought investors back to the market or at least that was the headline. The primary question is how long will they stay? Money flow has been strong the last two trading days on the major indexes showing a willingness to believe the future is going to be positive. There are plenty of bullish analyst and those who pontificate the upside is in play long term, but we will watch for evidence the trend is here to stay.

The open on Wednesday created plenty of gaps to watch. Scanning the sectors you can see two primary issues. First, the gap to the next resistance level for several sectors and indexes. XLK, SPDR Technology ETF closed at $29.80 resistance and will have to deal with that in order to move higher. The NASDAQ to 3110, etc. This could stall or create a test of the move higher, either way it will create some opportunities going forward. Second, several indexes hit new highs. Basic Materials (XLB), Industrials (XLI), Small Cap (IJR) and Mid Cap (IJH) all posted new highs above the September levels. This begs the question of how much upside is left without some test of the move? Both issues are worthy of our attention going forward and will set up better entry opportunities.

Does the bill passed by Congress change anything going forward? Not really. It provides some psychological relief for those making under $400,000 relative to capital gains and dividend taxes. But, reality is found in the economic outlook. The details have been lost in all the talk about the cliff. We have the jobs report on Friday and very little has been discussed for a change relative to the expectations of 153,000 new jobs. The ISM manufacturing data was good on Wednesday showing an increase to 50.7% from the 49.5% in November. At least there is some growth in the sector finally. The contraction shown in November was a concern. Construction spending was weaker than expected, but glossed over based on the stronger housing sales the last month. Today is the ADP Employment report and the jobless claims. The parade of data will continue next week as well.

The stronger sectors are where to focus your time and energy as we start the new year. Financials remain one sector that gets plenty of love and hate from investors. XLF held the $16 level of support and on Wednesday established a new high above the September levels. The banks (KBE) posted a gain back near the highs as well. The regional banks (KRE) don’t look as strong, but got a nice boost higher on Wednesday. Broker-Dealers (IAI) hit a new high helping the sector maintain it’s leadership.

Basic Materials (XLB) and Industrial (XLI) sectors are both above their September highs following Wednesday’s gap higher. Both have been holding up well during the recent selling and now resume their leadership role. The strength in the base metals (DBB) and large cap industrial stocks have been key.

Today we have to maintain some patience relative to jumping into the markets after the news induced move to the upside. It is equally important to remember it was the first trading day of the year and new money was being put to work. Watch and be disciplined as this all plays out short term.