Markets put up a nice response after Wednesdays robust gains, digesting just about all of them. The Nasdaq was UNCH, the S&P 500 was up .1 and the Russell 2000 by .3%. Keep in mind the Nasdaq rose 1.1% and the Russell 2000 by nearly 2% yesterday so the action has to be considered bullish. Listening to the negative spin regarding tax reform that is being talked about by news outlets, perhaps the markets are making up their on mind as to what will potentially happen, trying to be as apolitical as possible. Or maybe it was a reaction to the GDP number. For the week heading into Friday the Nasdaq is higher by .4% and the S&P 500 by .3% and it is looking for its third consecutive weekly CLOSE above the very round 2500 number. The longer it trades north of the figure, the heavier the burden of proof lies on the bears. It has now taken the shape of a bull flag formation and a break above 2512 carries a measured move of 70 handles higher.
Looking at individual sectors today it was the materials and utilities that led, the latter a rare occurrence recently. Coming into today it was lower 8 of the last 9 sessions and Thursday did complete a bullish piercing line pattern. The XLB has advanced 5 of the last 6 weeks and heading into Friday is higher by .4% and looking at a possible bullish 3 week tight pattern at all time highs. The chart itself could also be interpreted as a bull flag pattern and a break above 57 would carry a measured move to 60.50 and it did successfully retest a cup base breakout trigger of 56.02 taken out on 9/12 this Wednesday. Lagging today were the industrial and cyclicals taking a well deserved day off.
A true definition of a bull market is when very few shorts are working out. A good example of why the mean reversion plays just are not all they made up to be is below. Stocks are strong for a reason, and those that are tend to stay that way. I attempted to compare the performance of MCD with that of DRI CMG and BWLD, which are lower by 17, 37 and 39% respectively from their most recent 52 week highs, and that was clearly WRONG (MCD rests just 3% off recent all time highs). Sure they could begin to converge at some point in the near future, but part of surviving in this business is admitting your are wrong quickly and acting upon it. Here is the chart of MCD and how we profiled it in our Thursday Game Plan this week. The fries clearly are not soggy on this chart. Today the name powered back above its 50 day SMA and the catalyst is done, and therefore so are we.