The precipitous 21% plunge in crude oil prices in July has renewed the very bearish sentiment that was evident early in the year. The $6 billion loss reported by BP p.l.c. (BP) early this morning will not help the sentiment.
Though most of the population celebrates the low gas prices and the recent collapse in diesel prices investors who are still holding on to some of the high yielding energy giants are not happy. Many are wondering if they should sell now or just continue to hold on. Others are wondering when it will be time to buy some of these oil giants.
For example Chevron Corp (CVX) is down over 30% in the past year and lost 12% in 2014 and 6.8% in 2013. CVX had a high in July 2014 of $130.14 and based on its quarterly dividend of $1.07 was yielding 3.28%. It now yields 4.8% as it closed Monday at $89.14. Compared to the yield of 10 Year Treasuries this looks quite attractive.
Of course in determining an outlook for the energy stocks one must carefully analyze the crude oil futures. As I noted in June the tight six week trading range in May and June was a sign that the buying power had dried up which was negative for prices.
Now that prices are approaching the January-March lows, line b, in the $44 area the questions is whether a test of these lows will just be part of the bottoming process. The more negative scenario is that the trading range, lines a and b, is just a continuation pattern. If it were completed the 127.2% Fibonacci target is at $37.50 with chart targets below $30.
The weekly technical studies for crude are negative but they are still well above the lows from early in the year. The daily on-balance-volume (OBV) topped out on June 1st (line 1) as it broke through support. The OBV is already back to the March lows and it is acting weaker than prices.
The HPI, which uses volume, open interest and prices to measure money flow also turned negative with the OBV as it violated support, line d, and the zero line. The HPI formed a strong bullish divergence at the March lows which signaled that a bottom was in place. On a short term basis the HPI is still above the July lows so a short term bottom is possibly forming.
The Dow Jones Oil & Gas Index (DJUSEN) is the broadest measure of the energy sector.
- The monthly chart shows that there is next strong support in the 522 area, line b, which is approximately 8.7% below current levels.
- The long term uptrend that goes back to the 2002-2003 lows (line c) stands at 490.
- The relative performance has been declining since early 2008 and it broke major support in September 2014 (line 1).
- This signaled that it was acting weaker than the Spyder Trust (SPY)
- It will make another new monthly low this month.
- The weekly RS analysis is also in a solid downtrend and continues to make lower lows.
- The monthly OBV has been below its WMA for the past year and shows no signs yet of bottoming.
- There is first resistance in the 600 area with the 20 week EMA at 638.
The SPDR S&P Oil & Gas (XOP) dropped below monthly support, line e, in October 2014.
- In each of the next four months XOP dropped below its starc- band before the three month spring rebound.
- The monthly relative performance dropped below its support, line f, in September 2014.
- The RS line shows a pattern of lower lows and lower highs.
- The weekly RS line (not shown) is also making new lows.
- The monthly OBV also broke its support, line g, last September.
- The OBV has not yet made new lows so a bullish divergence could be forming.
- The weekly OBV (not shown) did make a new low last week
- There is first resistance at 441.60 and the March lows with the 20 week EMA at $4694.
What to Do: If you are not a short term scalper, bottom fishing is always dangerous. Therefore most traders should wait for clear bottoming signals before concluding that a low is in place.
For investors, scaling into a partial position in a sector is not always a bad idea. For those who feel that the economy will get considerably better before the bull market tops out some commitment to the energy sector will be warranted.
The eventual turnaround in this sector be sharp. Therefore establishing a small position in XOP or a broadly based energy ETF or mutual fund when everyone else is selling is not a bad idea.
The stock market’s reaction to a heavy week of earnings reports was not encouraging. It reinforces the view from last week that now was not time to jump back into the stock market despite the widespread bullishness. The drop this week is likely to reduce the bullishness but a tradable low for the overall market many be a number of weeks away.
The sharp gains on Monday were accompanied by signs that the rally was fueled by just a few stocks as I noted in Tuesday’s Narrow Advance Warrants Caution. The technical weakness did not support the new highs in the Nasdaq 100 which ended the week down over 2%.
According to AAII 32.7% of individual investors are were bullish as of last Thursday with just 25.6% bearish. The largest group are neutral and overall there was little change in the sentiment last week. The CNN Fear & Greed Index dropped from 32 last week to just 12 this week. In August 2014 it did drop into single digit territory just a week before the market made its low.
So what can investors do to ride out the correction during earnings season?
Last week’s stock trading featured a few winners but there were more losers as declining stocks swamped the advancing ones by a 4-1 margin. Some of the losers like Caterpillar (CAT) are large multinational companies that have been hurt by the stronger dollar and the resulting weakness in their overseas business. The decline in orders from China dragged down the earnings from both industrial and tech companies.
Even Apple Inc. (AAPL) was hit last week but that was consistent with its weak volume analysis. United Technologies (UTX) reported a 10% drop in elevator orders from China and it’s stock was down 10% for the week. IBM reported that revenues from China were down 15%. The lack of demand out of China was also a problem for Microsoft (MSFT) and VMware (VMW).
Even though biotech giant Biogen (BIIB) did beat on earnings their revenues were weak and the stock was down over 22%. This week we have 163 of the S&P 500 reporting profits so it is likely to be another volatile weak.
There were some winners as Amazon.com (AMZN) actually had a profit and Starbucks (SBUX) also moved higher late in the week while the overall market was declining. SBUX has been a market leader all year as has Netflix (NFLX) which reported earnings the previous week. The % change charts clearly illustrate the winners and losers as Caterpillar has been in negative territory all year and is now down over 17%.
In contrast Netflix (NFLX) was only negative for the first three weeks of 2015 but then accelerated to the upside as it is up over 119%. This dwarfs the meager gain of the Spyder Trust (SPY). It is always a good idea to concentrate in stocks or ETTs that are acting stronger than the S&P 500. This is especially true when the overall market is correcting as those stocks with strong relative performance generally hold up the best.
The relative performance or the ratio of a stock or ETF to the S&P 500 is the best way to pick the winners and avoid the losers. The weekly chart of Caterpillar (CAT) shows that the stock has been in a broad trading range, lines a and b, since 2012. The stock has made new lows for the year last week with next major support in the $71 area.
In contrast the relative performance (RS) line topped in early 2012 and has since been in a solid downtrend, line c. The lower lows in 2012 confirmed a new downtrend as the RS line has also made lower lows, line d.
Netflix Inc. (NFLX) stayed in a trading range for all of 2014 but then broke through resistance at line e, in April 2015. The RS line was acting much stronger as it dropped back to its rising WMA as prices were testing the 20 week EMA and still shows a strong uptrend.
The weekly chart of the NYSE Composite shows the drop below the uptrend, line b, that connected the December 2014 and the February lows just before the 4th of July long weekend. The two week rebound failed at the 20 week EMA which has now turned lower. Once below the recent low at 10,622 the next support is at the weekly starc- band at 10,509.
The weekly NYSE A/D line dropped below its WMA on June 5th which was a reason for concern. This week the A/D line will make a new correction low and this means the correction is likely to last longer. The next support is from the highs early in the year, line c. The daily A/D line has dropped below its WMA and is already close to the lows from three weeks ago.
The weekly on-balance-volume is still in a range, lines d and e, as it closed back below its WMA last week. The daily OBV (not shown) dropped below its WMA last Tuesday and is already close to the June lows.
The Spyder Trust (SPY) closed the week on its daily starc- band and just above the quarterly pivot at $207.38. A further decline to the July lows in the $204 area is looking more likely. There is additional support at $202.48 and the March lows, line a. The 20 day EMA is now at $209.74 with stronger resistance in the $211-$212 area.
The daily S&P 500 A/D line rallied back it resistance at line b, last week but has now dropped well below its WMA. The lower lows in the A/D line at the July lows, line c, made me question the recent rally. The A/D line needs to overcome the downtrend and last week’s highs to turn positive.
Last week’s data on the housing market was mixed as Existing Home Sales were strong while New Home Sales plunged 6.8% in the past month as they were much weaker than most expected. The manufacturing sector is still a concern as while the Chicago Fed National Activity Index was better than expected the Kansas City Fed Manufacturing Index was weaker. The PMI Flash Manufacturing Index held firm which was encouraging.
The most positive sign was the 0.6% rise in the Leading Economic Indicators (LEI) as most economists were only looking for a 0.2% gain. This is a composite of ten economic indicators and as the chart reveals it has a good record of topping out well ahead of a recession. It is still in a sold uptrend.
In addition to a full week of earning there will be plenty of economic data for the stock market to absorb. On Monday we get the Durable Goods Orders as well as the Dallas Fed Manufacturing Survey. On Tuesday the FOMC meeting begins and we also get the S&P Case-Shiller HPI, PMI Flash Services report and Consumer Confidence.
Wednesday we get the latest report on Pending Home Sales followed in the afternoon by the FOMC announcement. The advance reading on 2nd quarter GDP is out on Thursday and then on Friday we have the Chicago PMI and Consumer Sentiment.
Interest Rates & Commodities
The yield on the 10 year T-Note declined for the second week in a row and is down significantly from the late June highs. The daily technical studies do suggest that rates will decline further over the near term but a drop back below 2.00% is needed to signal even lower yields.
The plunge in commodity prices continued last week as the CRB index dropped 4.4% and gold dropped another $46 dollars. This was consistent with the negative weekly OBV analysis that has been pointing to lower prices since June. Traders are very bearish on gold so a short covering rally is likely in the next week
The crude oil futures declined another $3 per barrel last week as the tight weekly ranges in June (see chart) warned of lower prices. The crude oil futures have lost over $11 per barrel since late June. Crude oil is oversold on a short term basis so a rebound is likely in the next week but there are no signs yet of a bottom.
Since the July 4th column I have been pointing out that the small cap iShares Russell 2000 (IWM) was acting the weakest. The Russell 2000 was down 3.24% last week. This was worse than the 2.86% drop in the Dow Industrials and the S&P 500 decline of 2.21%.
All ten S&P sectors were lower for the week as the materials were down 5.66%, oil & gas stocks dropped 4.26% and the industrials lost 3.4%. The relative performance analysis has been negative on the materials and industrial sectors in 2015 as both triggered monthly low close doji sell signals in June (see chart)
This week Dupont (DD), Mondelez International (MDLZ) and Seagate Technology (STX) all report and they receive a large share of their earnings from China. This makes them quite vulnerable to an earnings downdraft.
For those who are looking to get involved in the stock market on this correction focusing on ETFs will help cushion you against an earnings shock from an individual stock. In terms of sectors the long term relative performance for health care and consumer discretionary continues to look the best. They will likely correct further with the overall market but should perform the best once the market bottoms out.
If you are already invested in individual stocks or ETFs another 2-4% drop in the S&P 500 would not be surprising. Owners of stocks that have not yet reported earnings could use options to protect their positions while those in strong ETFs should ride out the correction and could consider adding to positions at stronger support.
I feel confident that the technical studies will help correctly identify the next market low and you can follow my analysis during the week on both Twitter and StockTwits. For my regular weekly commentary see my columns at Tutor Your Trade.
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 (HAS) as it was up 6.3% while Halliburton (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 (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 (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.
- 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 some partial profits. I think you should be able to get back at lower levels in the weeks ahead and take on a lower level of risk.
Since the Spyder Trust (SPY) closed on July 3rd it has rallied 2.36% and has regained about 50% of the decline from the June 22nd high. The rally has been more relentless than I expected as I thought that it was likely to stall last week.
The Spyder Trust (SPY) and the PowerShares QQQ Trust (QQQ) have exceeded the resistance levels that I outlined last week. The QQQ made new all time highs due in part to the strong performance of Google, Inc. (GOOG) which was up almost 15% on Friday. The rally in the small cap iShares Russell 2000 (IWM) is currently stalled at it’s key resistance.
Overall earnings were better than expected except in the energy sector. The continued decline in crude oil prices that was in line with the negative technical readings from the end of June. Even some disappointing economic reports did not deter the buyers who apparently decided they had sold too much because of concerns over Greece and the Chinese stock market.
Farragut on board Hartford
But is now the time to Dam the torpedoes and go full speed ahead? This famous phrase is attributed to Rear Admiral David Farragut during the civil war Battle of Mobile Bay when he decided to steam the Hartford through an area of naval mines (torpedoes) in order to press his advantage and his decision turned out to be successful.
Even though the evidence is mounting that the correction is over it is not the time to chase prices as patience is one of the most important traits of successful investors. Let’s examine the evidence
The weekly close only chart of the Spyder Trust (SPY) reveals the six brief corrections since May 2013 with the change based on weekly close noted for each correction. The recent decline of 4.6% took six weeks and was one of the smallest of the recent corrections.
The correction last fall was the largest and a couple of weeks ago the market was sending out similar warning signals as it did last September. The 16% rally from the October 15th lows was much stronger that the 9.6% rally from the February 2015 low. A comparable rally from the recent lows could take the SPY back to the 2240 area. One simple measure of why this is not a good time to be chasing the market is that the SPY is now almost 2% above its 20 day EMA as it was 2.5% below it at the recent lows.
The NYSE Composite was able to regain its former uptrend, line b, on Thursday but closed right on it Friday. It is still below the monthly pivot resistance at 11,061 (red line). The former downtrend is now at 11,130, line a. The daily NYSE A/D line has improved significantly over the past week as the short term downtrend, line d, has been broken.
The A/D line is also now above its WMA which is starting to turn up which is also a plus. A move through the bearish divergence resistance (line c) would confirm that the correction is over. A pullback to the WMA should be a buying opportunity. The daily OBV did form a bullish divergence, line f, at the recent lows and has now moved through resistance from early in the year (line e)
The German DAX Index has surpassed the late June highs which suggests that it’s correction may be over. There is first support for the average now in the 11,300 area which corresponds to the now rising 20 day EMA. The Shanghai Composite was up 2% for the week but there is still massive resistance overhead that needs to be overcome in order to indicate that the correction is over.
The market is still significantly oversold based on the % of the S&P 500 stocks below their 50 day MAs. In late June and early July the 5 day MA of the stocks below their 50 day dropped below 29% which was two standard deviations below the mean at 60.8%. The downtrend, line a, is now at 58% and it could rally back to overbought levels in the 76-80% area.
On the sentiment side the %Bullish according to AAAI rose slightly last week but is still at relatively low levels. It never reached an extremely low reading consistent with a market bottom. The CNN Fear & Greed Index is at 32 and is back in fear territory but was much lower at 14 last week.
Last Tuesday’s Retail Sales report was much weaker than expected as it came in at -0.3% while most were looking for an increase of 0.3%. The continued weakness in this data series is in contrast to the data on consumer confidence and sentiment which had been improving.
On Friday the mid month reading on consumer sentiment from the University of Michigan came in at 93.3 which was lower than the lowest estimate of 94.5. Continued weakness in the retail sales data will be a problem as we get into the fall when the economy relies more on consumer spending.
The continued lackluster numbers on manufacturing are also troublesome as both the Empire State Manufacturing Survey and the Philadelphia Fed Business Outlook Survey were lower than expected. It appears that June’s jump in the Philly numbers was an aberration.
The best news on the economy came from the housing sector as the National Association of Home Builders as builder sentiment hit its highest level since November 2005. The HMI completed its bottom in early 2012 as it overcame resistance at line a. It still shows a solid uptrend, line a. Housing starts and permits also surged which supported the builder’s bullish sentiment.
This week we have Existing Home Sales on Wednesday, followed on Thursday by the Chicago Fed national Activity Index, Leading Indicators and the Kansas City Fed Manufacturing Index. Then on Friday comes the PMI Flash Manufacturing Index and New Home Sales.
The testimony by Fed Chair Janet Yellen suggests rates may be raised before the end of the year but aside from the jobs data the other economic data does not seem to support such a move. Though there are no early warnings of a recession the economic data over the next few months needs to get better in order to support a strong year end rally in stocks.
Interest Rates & Commodities
Yields declined slightly last week but are still in a short term uptrend after the rally accelerated in early June. For the past two weeks funds have been flowing into bonds and out of stocks. Any pullback in yields should be watched closely with yield support for the 10 Tear T-Note at 2.26% with more important now at 2.09%.
Crude oil and gold have continued to be weak and their technical outlook remains negative suggesting even lower prices. Gold dropped to a new five year low as the Comex futures closed below important support at line b. The recent trading range on the daily chart has downside targets in the $1080-$1100 area. The volume has been heavy on the decline as the OBV broke support three weeks ago when gold was over $30 higher.
Crude oil prices are trying to hold the quarterly pivot support in the $50 area. If this level is broken the next good support is in the $47-$48 area. The oil & gas stocks were one of the few losing sectors last week as they were down 1.4%.
In last week’s “Two Sectors Breaking Out” I recommended sticking with the strong health care and consumer discretionary sectors which were both up over 2% for the week.
In last week’s column I was looking for a rebound that would fail below the recent highs. The iShares Russell 2000 (IWM) was acting the weakest as it only gained about half as much as the S&P 500 did last week. This makes the close this week very important as a sharply lower close would negate last week’s positives.
The NYSE weekly A/D ratios were slightly positive but the A/D line is still below its WMA which supports a cautious outlook for now. Clearly the new highs in the Nasdaq and the improvement in the daily technical studies does suggest a pullback this week will be supported.
Nevertheless a patient approach is the best as one should not buy ETFs or stocks close to resistance where stops need to be more than 5% below your planned entry level. If a major new uptrend has begun there will be corrections or periods of consolidation where the risk on new positions can be better controlled. Look for updates during the week on both Twitter and StockTwits
The broad based rally on hopes that Greece’s debt deal would be finalized pushed all of the major averages to solid gains Monday as the advancing stocks led the decliners by almost a 3-1 margin. The Nasdaq 100 led the way up 1.72% followed by almost 1.50% gains in the S&P 500 and the Russell 2000. The VIX dropped another 18% after a similar drop last Friday.
There has been some improvement in the technical studies as the daily NYSE A/D line has moved back above its WMA but it is still below its short term downtrend. The McClellan oscillator has risen to +173 which is its best reading since last October. This combined with the high ARMS Index reading of 3.23 last week is a sign that I may have been too skeptical of the rally potential last Friday.
We will be better able to ascertain the strength of the rally once we get the first pullback which should happen this week. Even if last week’s rally is able to push the market above the previous highs, sector selection will still be the key.
There has been a wide gap in the performance of the sector ETFS this year as this % Performance chart illustrates. The Health Care Sector Select (XLV) and Consumer Discretionary Sector Select (XLY) are both up over 10% as they have solidly outperformed the 2.11% gain in the Spyder Trust (SPY).
In contrast the Industrials Sector Select (XLI) is down 3.1% while the Materials Sector Select (XLB) has done a bit better as it is down just 0.88%.
ive of the sector ETFS that I regular monitor closed last Friday below their quarterly pivots (highlighted in read) which is a sign of weakness. This included the Technology Sector Select (XLK), Energy Sector Select (XLE), iShares DJ Transportation (IYT) in addition to XLI and XLB. Therefore this week’s close will be important as these ETFs need to close back above these pivots to signal a potential trend change.
As the table indicates the monthly and weekly technical studies are negative on all five of these ETFs. Last week, XLE, XLI and XLK all formed doji’s last week so there is the potential for them to trigger high closed doji buy signals in the next few weeks,
The Consumer Discretionary Sector Select (XLY) gapped higher on Monday and is trading above the June high of $78.31. A close at current levels or higher would be above the resistance at line a.
- The next upside targets are in the $80.60-$81which corresponds to the quarterly resistance and the weekly starc+ band.
- The weekly relative performance moved through its resistance, line b, over four weeks ago which suggesting prices would then follow.
- The OBV also moved to new highs for the year as it surpassed the resistance at line c.
- There is initial support now in the $78 area with the rising 20 day EMA at $77.33
The Health Care Sector Select (XLV) also gapped higher on Monday but is still below the June high of $77.66.
- There is trend line resistance , line d, and the daily starc+ band in the $77 area.
- The weekly starc+ band is at $79.06 with the quarterly pivot resistance at $79.65.
- The relative performance moved to new highs in June as the resistance at line e, was overcome.
- The weekly OBV also moved to new highs at the same time and then pulled back to its support (see arrow) before the latest surge.
- The 20 day EMA has turned up and is now at $75.10 with the quarterly pivot at $74.05.
The weekly closes below the quarterly pivots reinforces the weak monthly charts for the Materials Select Sector (XLB) and the Industrials Select Sector (XLI).
The Materials Select Sector (XLB) formed a low close doji in June with the 20 week EMA and the monthly pivot support at $46.44. The relative performance has been in a downtrend since 2014 indicating that it has been underperforming the S&P 500. The OBV has been below its WMA since last October.
The Industrials Select Sector (XLI) formed dojis in both April and May. XLI triggered a low close doji in June with the monthly EMA and pivot support in the $52-$52.50 area. The relative performance formed a negative divergence in early 2015 as it failed to make a new high with prices, line b. The weekly OBV dropped below its WMA in April and still is below its WMA.
What to do? Both the XLY and XLV are a bit overextended on a short term basis as both are trading higher early Tuesday. This makes the risk a bit high at current levels on new positions. The safest place for stops would be under the June lows.
There needs to be improvement in the weekly technical studies before I would be looking to buy either the Materials Select Sector (XLB) or the Industrials Select Sector (XLI).