The conventional wisdom was that there would be selling on the first trading day of the new year, as market players that delayed triggering taxable gains finally had a chance to sell. There was some selling in small cap stocks (iShares Russell 2000 Index (IWM) ), but it was a peculiar mixture of action with big caps like Apple (AAPL) , Microsoft (MSFT) and Advanced Micro Devices (AMD) rampaging to new highs with no signs of profit-taking pressure at all.
The Dow Jones industrial average, the S&P 500 and Nasdaq composite all had substantial gains that accelerated into the close, while the Russell 2000 exchange-traded fund was in the red most of the day, but closed close nearly flat. Breadth was flat for a while during the day, but ramped up into the close and finished with about 4,300 gainers to 3,200 decliners. The senior indexes greatly outperformed breadth.
It is likely that the action Thursday was driven in large part by automatic inflows into 401(k) and retirement plans as well as passive mutual funds and ETFs. The cash that goes into those vehicles tends to drive the big cap names that are the major components of the indexes. Apple, for example, was strong all day and managed to cross the $300 level for the first time.
While inflows likely had a strong influence, the big Kahuna continues to be the central banks. The People's Bank of China provided more than $100 billion of liquidity and there were no signs that the Fed's "not quantitative easing" program is slowing.
This liquidity is crushing a wide variety of indicators that are flashing warning signs as the indexes and many stocks become grossly extended and sentiment appears to be unusually complacent. Much of the action Thursday could be characterized as "frothy."
There simply is no way to accurately time when a notable reversal may occur. Overbought markets can be even more overbought, especially when there is still idle cash looking for a place to go.
In 2017, the S&P 500 never went under the lows of the first trading day of the year. It is highly unlikely that will happen this year, but it sure feels like a possibility given that buying rampage we saw Thursday.
The good news is that it is already Friday tomorrow. I'll see you in the morning.
