Internet Sector Giving Bulls Glimmer Of Hope

Internet stocks rebounded with a fury the past few days, overcoming key resistance and giving investors hope for signs of life from the bull market.

Wrapping up the first month of 2016, there has not been a whole lot for investors to cheer about this year. In fact, it was one of the worst opening months in stock market history. That said, the past few days did perhaps provide some glimmers of hope for the bulls out there. One of the rare bits of good news this month comes from the internet sector.

This former leader – and a poster child for the bull market – showed some signs of life over the past few days as it staged a furious rally, on the heels of blowout Facebook earnings Thursday. Late in the day Thursday, we posted a chart indicating that, in our view, the internet sector was running into resistance, as measured by the Dow Jones U.S. Internet Index. That resistance was mainly in the form of the index’s prior lows in October through early January, around 1040, the 61.8% Fibonacci Retracement of the December-January decline near 1044 and the declining 50-day simple moving average near 1050. This trio appeared to stage formidable resistance for the sector. Indeed, the Index did stumble near the levels mentioned late Thursday and looked ready to drop sharply further when Amazon badly missed its earnings after the close.

But that is not what happened today. Instead, the index jumped 2%, surpassing all of those levels and closing at 1066. This is key as those areas of resistance mentioned marked the greatest impediment to the sector returning to its all-time high levels. Now, it is a feasible possibility.

So, amid a January path of destruction and carnage, one sector has eclipsed one particular level of resistance, huh? How nice. But, in this case it may be bigger than just that. For one, this is a former leading sector and one at the epicenter of the FANG-inspired bull-bear philosophical battle. If the bulls can reclaim the sector as a market leader, they may once again have a rallying cry.

Perhaps more important is the fact that any major sector period has moved to within spitting distance of its former highs. In our view, as long as there is something moving in an upward trajectory, the worst bear case scenario is likely put on the back burner. At the very minimum, the Armageddon, correlations-to-1, fall of 2008 scenario would appear to be forestalled for the time being.

As low as that bullish bar is, it is at least higher than the depths of despair being peddled 2 weeks ago. Yes, those depths may again be revisited down the line. In fact, we would say that is very likely. However, if at least the internet sector can move back to its former highs, and beyond, then the worst case scenario is likely not yet upon us. Now, a new high in the internet sector is not a cinch. It still has its work cut out for it (plus, who knows what kind of month-end chicanery was involved in today’s trading). However, those odds are a lot better than they were just 2 days ago, in our view.

Therefore, with signs of life from the internet sector, perhaps the bull’s heart is still beating, albeit faintly. And while that may not be the most bullish outlook on Wall Street, coming from a fairly pessimistic firm regarding the longer-term prospects for stocks, this is, objectively, about the best we can do at the moment.
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The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.