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Narrow Advance Warrants Caution

|Includes: AAPL, GOOGL, MSFT, QQQ, SPDR S&P 500 Trust ETF (SPY)

The additional new highs for the Nasdaq Composite and Nasdaq 100 helped keep investors optimistic after the close despite the disappointing earnings from IBM. The focus during the day was on the better than expected results from Hasbro (NASDAQ:HAS) as it was up 6.3% while Halliburton (NYSE:HAL) gained 1.8%.

It has been a great month for stocks with the Nasdaq Composite up 4.65% followed by gains of 3.3% in the S&P 500 while the big cap Dow Industrials is up 2.7%. Meanwhile the selling has been heavy in the commodity markets as the materials and energy sectors have been trailing the overall market.

Despite the overall market gains there continue to be some internal signs of weakness that investors need to be aware of as we enter the seasonally weak last part of July. Some of the concerns were outlined in Friday's Week Ahead column.

Monday's trading just reinforced the view that it has been a narrowly based market rally as there were twice as many declining stocks as advancing ones on both the NYSE Composite and Nasdaq Composite.

Let's look at two key market tracking ETFs.

The Spyder Trust (NYSEARCA:SPY) made a new all time closing high of $212.62 on Monday even though the S&P 500 did not. The resistance from the May-June highs, line a, was overcome.

  • The close was 1.6% above the rising 20 day EMA which is now at $209.40. A pullback to this level would not be surprising.
  • There is more important support at $207.38 and the quarterly pivot.
  • Though SPY has made new highs, the S&P 500 A/D line is just back to the resistance from June, line c.
  • On a longer term basis the A/D line has made lower lows, line d, while prices have made higher lows (line b)
  • The on-balance-volume (OBV) has broken out above 3 1/2 month resistance at line e, but did make lower lows in June.
  • The SPY is still well below its daily starc+ band at $216.03

The Powershares QQQ Trust (NASDAQ:QQQ) has soared from the $106 level on July 9th to close at its daily starc+ band on Monday. The top three holdings of Apple (13.9%), Microsoft (7%) and Google (4.3%) have clearly given the QQQ a boost. Apple, Inc. (NASDAQ:AAPL) does report earnings after the close today.

  • The daily trend line resistance, line f, was also reached on Monday.
  • There is initial support now at the June highs in the $111 area.
  • The rising 20 day EMA is at $109.84 which is 3.8% below Monday's close.
  • Despite the sharply higher prices, the Nasdaq 100 A/D line has just reached its downtrend, line h.
  • The WMA of the A/D line has turned up but could be tested on a pullback.
  • The daily OBV has been very strong over the past week when it moved through resistance at line i.
  • The longer term lower lows in the OBV, line j, are nevertheless still a concern.

What to do? Most of the market leading sectors like health care and consumer discretionary are also overextended on a short term basis. They could see easily see a 1.5-2.0% pullback as could the major averages.

Those who have some quick profits and want to reduce your equity exposure heading into August should consider taking at least some partial profits. I think you should be able to get back in at lower levels in the weeks ahead and therefore take on a lower level of risk.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.