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The Market Is Frothy Up Here

We are moderately overbought, both on a short-term and an intermediate-term basis.

The Market

This coming week will bring us more earnings, a Fed meeting and the end of the month. So there will be plenty for the market to digest. And still I don't see the market having any sort of significant upside from here.

You already know the list of indicators, but let me review them once again. We are not oversold; we are moderately overbought, both on a short-term and an intermediate-term basis. The number of stocks making new highs continues to contract. The sentiment continues to show plenty of complacency as well. The Russell has been lagging the S&P for six weeks now as well. That needs to turn around to get me to believe the market can make a lot of progress on the upside from here. The only indicator that remains on an upward track is breadth. Yes, breadth was red on both Thursday and Friday, but it was minimal and the S&P was red as well.

In the last three years, we saw breadth falter for quite some time in advance of a market correction. If I see breadth falter considerably, I would look for a big market rollover. After all, we've got yet another sign that the market is frothy up here. The Insider Sell/Buy Ratio has literally zoomed upward. Just a quick glance at the chart will tell you that.

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Let me say that this looks incredibly high and considering it is over 60%, it is. But way back in early 2014, as the market came off that great run in 2013 the Insider Ratio surged as well, to over 75%. Here is the chart.

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Here's what the S&P did afterwards:

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Will the market be held together through month end? Will the Fed say things that soothe the market? I don't have the answer to those questions, but I do know that we have a lot of complacency with a lot of choppy action. That, to me, has always been a recipe for losing money, since you make some here and lose some there. Typically, the way to resolve that is through a correction, to shake out weak holders. I'd be surprised if February doesn't bring some sort of shakeout.

New Ideas

I need to address the decline in the retailers, and Macy's (M) - Get Free Report in particular. I know I said I thought there might be one more shakeout in Macy's, so on its own the action doesn't bother me so much. However, I did expect if this happened we would see folks screaming "sell these stocks"; instead, I see complacency. That is what bothers me, that folks are still willing to bottom fish in the retailers. Therefore I need to note that my confidence is slipping now.

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Today's Indicator

Once again, like a broken record, let me report that in early December Nasdaq was at 5400 and had almost 600 stocks making new highs. Today it stands at 5660 and Friday saw 142 new highs. That's called contracting, not expanding.

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Q&A/Reader's Feedback

WisdomTree Japan Hedged Equity Fund (DXJ) - Get Free Report, an ETF to be long the Japanese market, has a measured target around $52 with a possibility at $54. So with the chart already trading near $51, it seems to me there is likely not a lot left in it. Once a stock hits a target, it can go sideways to digest or it can correct much more substantially. I do not have a feel for which DXJ will do, so I would not add to it here. I might be inclined to take some profits and put in a trailing stop under $49.

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I am quite surprised that Clorox (CLX) - Get Free Report did not collapse with the Colgate (CL) - Get Free Report earnings disaster on Friday. That said, there is a lot of resistance overhead. So unless there is a blowout quarter that forces shorts to run for cover, I think it is more likely this chart does backing and filling between those November/December lows and that September high; so call it a wide trading range of $112-$125.

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The iShares Dow Jones US Home Const. ETF (ITB) - Get Free Report, the home construction ETF, had quite a week last week. As you can see, there was a big gap up and it is now giving some of it back. What I have seen much of lately is that these gaps up do not stick, but rather they slump and shuffle lower before hopefully finding their footing again. See the Amgen chart below as a perfect example.

That said, if ITB can pull back into that $28-$28.50 zone, I would probably like it, since there is a measured target in the $32-ish area.

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On the chart of Amgen (AMGN:Nasdaq) you can see the gap up (red arrow) followed by the give-back. I still like the chart, but now feel a stop under $150 is needed. The stock has met its initial target of $160, so it may just be trapped in a sideways chop now.

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