Dow Jones Industrial Average Sets New Record Close After A Volatile Week

Includes: DIA, IWM, QQQ, SPY
by: Wall Street Sector Selector

by John Nyaradi

The Dow Jones Industrial Average (NYSERCA:DIA) added 167 points on Friday to close at 15,761 while the S&P 500 (NYSEARCA:SPY) gained 0.5% for the week to close just below record highs. The Nasdaq Composite (NYSEARCA:QQQ) slid 0.1% week over week while the Russell 2000 (NYSEARCA:IWM) index of small cap stocks added 0.4% on the week.

On My Stock Market Radar

The Dow Jones Industrial Average and other major U.S. stock indexes continue to levitate higher in spite of increasing volatility and a sharp sell off on Thursday. The market is becoming rather bi-polar as indexes diverge and economic news becomes contradictory as Friday's jobs report came in much stronger than expected while consumer sentiment fell to a two year low and broadly missed expectations.

dow jones industrial average, dia,

Chart courtesy of

The volatile and confused action can be seen in the chart of the Dow Jones Industrial Average as it took a big sell off on Thursday, followed by a huge rally on Friday, but still remains below recent highs. RSI indicates that the average is near overbought levels while momentum as represented by MACD shows a negative divergence as MACD declines but prices continue to rise.

Many other cautionary indications continue to litter the landscape:

1. Major financial figures, including most recently, Laurence Fink, CEO of Blackrock, have expressed concerns that the market is becoming "bubble-like" or "frothy" and that the Federal Reserve needs to curtail its asset buying program to avoid a dangerous asset bubble.

2. According to the American Association of Individual Investors, as of October 30, the AAII Investor Sentiment Survey indicated that 44.97 percent of AAII members were feeling bullish about the stock market, while only 21.48 percent considered themselves bearish. 33.56 percent of AAII members had a neutral outlook about the direction of the market. According to Investors Intelligence, as of October 29, 52.6 percent of the surveyed investors were bullish and only 16.5 percent were bearish, resulting in a bull/bear ratio of 3.19. The bull/bear ratio has not been above 3 since 2011.

Is the fact that stock market bears have become an endangered species a contrarian indicator? Many commentators believe so, comparing the situation to the "magazine cover indicator," which is based on the notion that by the time a major business magazine focuses on a stock market rally - it is usually too late.

Bulls outnumber bears by a large percentage and the last time levels like this were reached the S&P 500 fell nearly 10% between April and June, 2012.

3. Fundamentals aren't that great. According to John Butters at Factset Research Systems, as of November 1, 79 of the companies in the S&P 500 Index had issued earnings guidance for the fourth quarter of 2013. Of these 79 companies, 66 had issued negative earnings guidance and only 13 had issued positive earnings-per-share guidance. As a result, the percentage of companies issuing negative guidance for the fourth quarter of 2013 (as of November 1) is 84 percent. The 5-year average for the percentage of companies issuing negative earnings guidance is only 63 percent. From this perspective, it appears that fourth quarter earnings could be ugly, which could put further downwards pressure on stocks.

Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.