The Trend Is Still Your Friend - Until Proven Otherwise

Published on September 1, 2017 @ 7:38am

Another tremendous day yesterday has now put the major indices in potential melt-up mode. However, in an effort to remain completely objective, the DOW does still need to close above the 22,000 level before there's going to be any further bullish technical context for higher levels ahead across the major indices.

You can see in this daily chart of the DOW below the Index couldn't muster enough strength yesterday to close above the 22,000 level, so we'll see if it can get it done today. If it can, it's another feather in the bulls' cap. If it can't, it does give the bears a little hope.

There's no question this week has been one of the biggest reversals we've seen in quite some time, but then again how many times have we seen these markets save themselves at that very last technical minute? Well, every time.

Most of you know biotech and healthcare have been on a real tear in recent weeks - something we mentioned was starting to happen a few months ago. Now, we're seeing both sectors continue to lead handily, but there is somewhat of an underlying fundamental problem to it all.

The entire biotech space is literally in melt-up mode, and although we're clearly happy about it for obvious reasons, it's actually a bit of a concern.

Why? Because so many biotech names with very little fundamental merit are sky rocketing in sentiment. Further, much of the biotech space has been under pressure for an extremely long time, so much of what we're seeing right now is an awful lot of short covering and reckless abandon in names that really do not warrant the move.

The point here is it's important to remember "most" biotech stocks should only be dated - never married - unless of course the Company in question has a solid financial foundation, its development stage product is promising, and more importantly is far enough along in the clinical trial process to warrant the bullish speculation.

The bottom line is it's important to make sure you're trailing gains in any biotech plays with a protective stop in an effort to ensure gains - while limiting your downside risk. It's not just savvy, it's prudent, because as fast as any biotech can go up, it can come down even faster.

We're definitely not trying to rain on the markets' recent parade, but we've been around long enough to know this is precisely what starts happening when the markets are looking for something to hang their hat on. Several weeks ago it was a divergence with industrials, and now it's a melt-up in healthcare and biotech.

Although we'll clearly take it, our completely objective and unbiased opinion is not one of tremendous comfort yet.

Sure, the NASDAQ now has every right to find its way to roughly 6,600 and change, but depending on how it gets there is going to be far more important than just getting there. Meaning, if these markets go into runaway freight train mode to the upside, that's actually not going to be a good thing, because that's often a sign of a developing top. We're not suggesting a developing top right now, but it is something we need to be cognizant of.

The economic front isn't something we talk about much these days, because nothing has really changed. From one month to the next, we get modestly better or modestly worse jobs data, consumer sentiment data, GDP data etc., so there really hasn't been any sort of economic trend developing these days that would warrant a major market change.

Our economy is still clearly in somewhat of a slow growth phase - one the markets have simply come to accept - only on the basis of an ongoing dovish monetary environment, which by the way isn't something we expect to change either. Why? It's our belief the Fed is somewhat stuck.

Just look at this long-term monthly chart of the 30-year treasury dating back to 1995. It's been pretty much been a straight line south since. In our opinion, there's probably no way the Fed can raise rates of any significance, because one could only imagine what it might do to our ongoing slow growth environment, and more importantly the equity markets.

This is why there's a an awful lot of chatter on Wall Street about tax reform and infrastructure buildout referendums, because if we can get those, it's likely going to be the drug Wall Street needs to continue taking these markets higher - as those would be the new tails that wag the dogs.

For now though, we'll continue to look for fundamentally sound ideas with nice technical implications, because at the end of the day... the trend is still our friend.

We hope all of you have an excellent long weekend with good friends and family, and we'll see you on Tuesday.

Actions To Consider Today:

Continue to trail any gains up with protective stops based on your own risk tolerance.

Individual Company Updates:

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