The markets took a long awaited pause last week as the Dow Industrials declined 0.5% as did the Nasdaq Composite while the S&P 500 lost 0.7%. The decline corresponded with a drop in crude oil prices after the May contract moved briefly above the $42 level.
The drop in crude was attributed to an increase in supply. This was the sixth week in a row where supplies had increased however the 9.4 million barrel jump was more than three times the average forecast.
My analysis of crude oil in 2016 provides a good example of a missed opportunity. On January 21st I wrote a column ” Time To Squeeze The Short Oil Speculators?” where I expressed my view that crude oil was ready for a short covering rally.
Psychology plays an important role in one’s investing success so by concentrating on ones mistakes you are less likely to succeed in the future. Many investors and traders spend too much time over their missed opportunities. This is the reason I have always placed a strong emphasis on having a plan and focusing on the risk rather than the potential reward of any investment.
Crude oil rallied from a low of $27.56 to a high of $34.82 before it again turned lower making a new low on February 11th. Though my technical indicators did suggest the stock market was bottoming at the time (Is There Blood In The Streets Yet?) there were no similar bullish signs for crude oil. The OBV, one of the most reliable technical studies, made sharply lower lows with prices (line c) which was not a bullish sign.
Still crude oil rallied sharply back to the late January highs before it again turned lower (see highlighted section). In over 30 years of studying and trading crude oil I knew that the odds favored a pullback to the $29-30 area where stronger buy signals would emerge.
Instead the correction was quite shallow and while the OBV did move above its WMA the volume was not impressive. The OBV has still not been able to convincingly overcome the long term downtrend, line c. By the time crude reached the $33.50-$34 area a stop of over 10% would have been required on longs which given the upside in the $38-$40 area made the risk/reward unfavorable. There were also not clear bullish signals in the energy ETFs as there were in the material sector.
Although I was frustrated by this it did not change my methods or my way of analyzing the markets. In my experience too many investors or traders adopt a method or strategy until they miss a trade or lose money and become frustrated. It is at that point that they then decide to find a new approach.
Having a steadfast plan or strategy is often the most difficult challenge for investors or traders. While prices were plunging in January I advised investors not to bail out as I was confident there would be a strong rally by the end of the quarter where portfolios could be evaluated.
Selling out on the decline was not surprising as the sentiment was close to suicidal for even the most seasoned investor. Those that had a plan to stay invested until there were clear signs of a bear market now feel pretty good while those who sold out are now questioning their methods. This has caused a crisis of confidence for many
It is my hope that those who sold will not become disillusioned by the stock market since there are no warnings of a bear market. Most importantly stay patient as there is never a good reason to sell in a panic or to chase prices higher as you will always have another chance. There should be a correction in the coming weeks if you want to buy.
Valeant Pharmaceuticals (VRX) stayed in the news last week even though it rebounded sharply and gained 16.3% for the week. The stock was the focus of last week’s column (The Week Ahead: Investor Meltdown – What Were These Pros Thinking?) as I tried to urge investors, as I have in the past, to know what you are buying.
This case illustrated how having an oversized position in any one market can be disastrous to your portfolio. Employees of companies like Enron learned the same painful lesson. Though I thought it was inexcusable for Sequoia Fund to have such a large percentage in VRX it was unfortunate that this one investment ended the long and successful career of fund manager Robert Goldfarb.
As was the case in 2015 this year has been one where investors have had to be selective. Last year the SPY was up just 1.25% while the Consumer Discretionary Sector Select (XLY) as up 9.9%. The weekly relative performance on the XLY moved above its WMA at the start of the year and did not drop below it until December 2015.
A Wall Street Journal article pointed out last week how poorly the Nasdaq Composite had done so far in 2016 when compared to some of the other major averages. Through the close last week the Nasdaq Composite is down 4.7% YTD while the SPDR Dow Industrials (DIA) is up 1.2%.
The daily chart of DIA shows that it overcame the downtrend, line a, from the December highs seven days ago while the Nasdaq Composite is still well below its similar downtrend, line c. The difference in performance was signaled by the RS analysis which made DIA the favorite for Viper ETF clients.
During the rebound in late January and early February the RS turned higher on DIA and moved back above its WMA. It then surged at the February 11th lows as the Dow Industrials A/D line was forming a bullish divergence. The RS line is still in a strong uptrend as has DIA has continued to act stronger than the S&P 500.
This is in contrast to the action of the relative performance on the Nasdaq Composite which made a sharply lower low with prices in February. Though it did surpass its WMA at the end of the month it has made lower highs in March (line d) consistent with a market that was lagging the S&P 500.
This table from the WSJ shows that just ten of the Nasdaq Composites stocks have accounted for more than half of the Nasdaq Composites decline through last Tuesday. If you had an overly large position in Amazon.com (AMZN) your performance would be much worse than if you had a diversified portfolio as AMZN is down 13.8% so far in 2016.
Some of these stocks other than AMZN have presented some good trading opportunities as Intel Corp (INTC) had a good buy setup on February 25th as the momentum had turned positive by moving above its WMA. The OBV had dropped back to its WMA creating a bullish zig-zag formation. This trading position was just held in the Viper Hot Stocks portfolio for sixteen days reaffirming my view that 2016 is not yet a buy and hold market like we have seen in banner years like 2013.
As I have been saying for the past week or so this is not currently a market where you should be an aggressive buyer. The outlook for the US market is detailed in the Market Wrap section but one factor that has me concerned is the relatively weak rebound in the Euro markets.
In my analysis in early March I commented that the German Dax Index had dropped back to the major 50% support level and then turned higher. Some of the momentum indicators like the MACD-His did form positive divergences at these lows.
Not only has the rally so far failed to reached the downtrend, line a, in the 10,900 area it has just reached the short term 50% resistance from the December highs. The DAX formed a doji two weeks ago and closed lower last week which is not surprising given the recent horrific events in Europe. The rebound so far has the characteristics of a rally within a downtrend and a drop much below the 9300 level would suggest the rally was over.
Most of the economic data last week was not enough to stimulate new buying in the stock market as the comments by some Fed Governors about the possibility of another rate hike in April made some traders nervous.
The Chicago Fed National Activity Index Monday came in at -0.29 and was weaker than expected. Utility output was weak while the manufacturing output was up 0.2%. Existing Home Sales also dropped sharply and were weaker than expected due in part to a lack of available supply.
There were no signs of a significant pickup in factory activity from the flash reading on PMI Manufacturing. The Richmond Fed Manufacturing Index improved sharply to 22 which was the strongest reading since April 2010 as new orders surged. The chart shows the breakout above six year highs, line a, but to confirm we need to see more positive data in the coming months.
New Home Sales were up 2% in February but Thursday’s Durable Goods was a disappointment as they were down 2.8%. Econoday commented that the weak orders “will pull down first-quarter GDP estimates”.
Unlike some of the other more encouraging data the Kansas City Manufacturing Index was weak at -6 but better than February’s reading. The final reading for 4th quarter GDP was better than expected at 1.4% while most were looking for 1.0%. Stronger consumer spending help boost the GDP which is a positive sign going forward for the economy. Friday’s drop in corporate profits is a concern as they were down 3.6% because of the weakness in energy and chemical companies.
The schedule is full this week with Pending Home Sales and the Dallas Fed Manufacturing Survey on Monday followed on Tuesday by the S&P Case-Shiller HPI and Consumer Confidence.
The ADP Employment Report is out on Wednesday with the Chicago PMI on Thursday In addition to the monthly jobs report on Friday we also have the PMI Manufacturing Index, ISM Manufacturing Index, Consumer Sentiment and Construction Spending.
The yield on the 10 Year T-Note rose last week as the rally from the February low in yields has continued. A move above the 2.00% level (line b) is needed to signal higher yields while the long term downtrend is at 2.22%.
The stronger dollar last week pressured the commodity markets last week and stronger sell signals were generated in the gold market ( ” How To Use Inverse ETFs For Timing and Trend Confirmation”). The longer term analysis does indicate that the correction will present a buying opportunity. The crude oil market does look closer to completing a top but there are no strong sell signals yet.
At the February lows I stressed that it was the strength or weakness of the market internals on the rally that would tell us whether it was a bear market rally or a resumption of the bull market.
At the start of March the NYSE A/D line moved through its downtrend, line b, which was a sign of strength. This was the first indication that this was more than a bear market rally.
The ability of the A/D line to also overcome the late 2015 highs was also a bullish sign. The weekly chart of the NYSE Composite shows that it traded last week inside the prior week’s range. This makes it a bit less likely that we will see a rally to the 61.8% resistance at 10,362 before the market consolidates or corrects.
The initial support is at 9930 and the 20 week EMA with stronger at 9550-9700. It would not be surprising to see the A/D line pullback to its rising WMA when the market corrects.
The Spyder Trust (SPY) failed to reach the downtrend (line a) at $206.60 as it stalled in the $205 level before pulling back to the 20 day EMA at $201.86 on Thursday. There is additional support now at $200 with the last swing low at $196.36 which is very close to the 20 week EMA at $196.50.
The daily S&P 500 A/D line formed a bullish divergence at the February lows and has now moved well above the November highs, line b. It is still below the May 2015 highs which must be overcome to give an all clear signal for the bull market.
It will likely take some time before there are clear signs that the A/D line has topped out. The OBV is still holding above its WMA and the uptrend, line d. It is still lagging prices as it is well below the highs from last fall.
The weakness in biotech has held back the Nasdaq 100 which shows a more sluggish uptrend. The PowerShares QQQ Trust (QQQ) was able to overcome the 61.8% resistance at $107.62 last week. The Nasdaq 100 A/D line did make a new high with prices with good support for QQQ now in the $103-$105 area.
The small cap iShares Russell 2000 appears to be forming a continuation pattern that favors another push to the upside before a deeper correction. The formation has targets in the $114-$116 area where major resistance exists.
What to do?
The March the continued improvement in the technical evidence have made it more convincing that the February low was a intermediate term bottom in the ongoing bull market. However it will be the nature of a correction in the next few weeks that will tell us more. It would take several weeks of sharply lower prices and very negative A/D numbers to alter the outlook.
I would not be surprised to see another push to new rally highs before we see a deeper and more sustained correction. The monthly jobs report and full slate of economic reports are likely to cause an increase in volatility this week. I would still not be chasing the overall market higher and would be looking to take some profits on strength.
For those not invested a correction will set up a better risk/reward opportunity to invest in diversified ETFs or in some of the currently bullish but overextended sector ETFs. If you sold out during the January slide be patient and take time to review your investment plan.
For traders there are still some good opportunities in individual stocks. If you are interested in trading the high momentum stocks in the IBD Top 50 and Nasdaq 100 you might consider the Viper Hot Stocks.
The nervousness over the FOMC meeting was not warranted as stocks rallied nicely on Wednesday and continued sharply higher for the rest of the week. The five consecutive weeks of strong market action has confounded many market professionals and has further frustrated investors.
The severity of the drop did create a massive change in sentiment and pushed many market measures into extremely oversold territory. This did not make it any easier to ride out the push to the downside on January 20th. Some money managers are now relating how difficult it was to hold their clients hands during the market’s decline.
After the market bounced from the January lows I concluded that “The majority of traders are still looking for a break below 1820 in the S&P 500 so a rally that lasts longer would not be surprising.
Technically it seems as though the stock market needs more time to repair the technical damage so once the current rally tops out then the market could drift back towards the January lows. This could complete a more sustainable market bottom …”
It was the new correction lows on February 11th that finally completed the market’s bottom and one indicator that I focused on the time was the divergence in the 5-day MA of the % of S&P 500 stocks above their 50 day MAs.
The chart on the left from Viper ETF Report shows that on February 10th it was at 24.1% well above the January 19th low of 12.8%. This divergence, combined with the positive signals from the McClellan oscillator (see chart), the sentiment readings and NYSE H/L analysis indicated that the market was ready to turn higher.
The updated chart on the right shows that % has now risen to 89.88% which is the highest reading since November 2014. Four weeks after it peaked the Spyder Trust (SPY) had a two week, 5% correction. As I discuss further in the Market Wrap section this one of the factors that has me looking for a correction.
As the market was moving higher all week the focus of many investors was on the meltdown in Valeant Pharmaceuticals (VRX). The company slashed earnings guidance and acknowledged that they were still unable to file their annual report with the SEC. The stock dropped 51% last Tuesday.
As I pointed out in October 2015 I thought it was it inexcusable for any investment professional to allow one stock make up a large percentage of their portfolio. I was appalled to learn that the highly touted Sequoia Fund (SEQUX) had almost 1/3 of their assets in VRX. Investors Pershing Square Capital Management’s Bill Ackerman had to spend several hours explaining his $4 billion investment in VRX. He was on the hot seat again last week as were other large VRX investors.
In the past year SEQUX is down 23.9% and in a Forbes article last week it was noted that ” In total, the four major investors in Valeant—ValueAct, T. Rowe Price, Pershing Square Capital Management and Ruane Cunniff & Goldfarb, suffered a combined $3.66 billion in paper losses on Tuesday.”
It was also surprised to learn last fall that Sequoia Fund (SEQUX) was still being recommended by some advisors and was highly rated by Morningstar. Though I have great respect for their analysis they failed to review their ranking until last week.
I hope this sends a powerful message to investors that you should always know what you are buying. Take the time to determine the holdings of any mutual funds or ETFS that you are considering. If you are working with an advisor who recommends a fund, ask them if they have closely looked at the fund’s holdings. Their answer should help you decide whether you have the right advisor.
As part of my analysis routine I look at the holdings of an ETF before it is recommended to clients of my Viper ETF Report . Some of the ETFs that I follow like the Energy Sector Select (XLE) are not my first pick in the energy space because they have 19.9% holding in Exxon Mobil (XOM).
This is in contrast to the SPDR Oil & Gas Exploration (XOP) whose largest holding is 3% in Cabot Oil & Gas (COG) with just 2.6% in XOM. With the internet it is easy to find this information quickly so I hope all investors and traders will take the time to do your own research.
The weakness in the dollar has also gotten much attention but there was evidence at the end of January (Is This The Stock Market’s Secret Weapon?) that it has broken key support, line a. The dollar index had a classic two week rally from the mid-February lows before resuming its downtrend. It will make new correction lows this week with the 38.2% Fibonacci retracement support in the $92.45 area. This is approximately 2.7% below Friday’s close.
I continue to expect that the weaker dollar will help boost earnings in the next few quarters as exports from the US will become more attractive. The more cautious tone from the FOMC put additional pressure on the dollar and has given many of the Asian currencies quite a boost. The Singapore dollar and other currencies in the region hit multi-month highs.
The stock market paid little attention to the economic data this week as it put more emphasis on the FOMC announcement. The February Retail Sales came in at +0.3% but the downward revisions of January’s numbers still does not paint a rosy picture of consumer spending.
Producer Prices were also soft but for a change the Empire State Manufacturing Survey was positive after six months of weakness though inventories were weak again last month. The Housing Market Index was unchanged as apparently as builders are limited by available lots and qualified labor. The Housing Starts Wednesday did not help as permits were down 1.3%.
The Industrial Production was lower overall than the consensus estimate but there some positive components and Thursday’s Philadelphia Business Survey came in at 12.4 up nicely from -2.8 the prior month.
My favorite economic indicator, the Leading Economic Index (LEI) increased by 0.1% in February after declining the previous two months. It has a good record of peaking before a recession as it peaked 15 months before the 2008. Clearly it is not rising as strongly as it was in 2015 but the Conference Board commented that ” its six month growth rate remains consistent with a modest economic expansion.”.
The mid-month reading on Consumer Sentiment came in at 90 which was the lowest reading in the past six months but if stocks remain strong it could improve by the end of the month.
The Chicago Fed National Activity Index is out on Monday along with Existing Home Sales and it is followed Tuesday by the flash reading on PMI Manufacturing Index as well as the Richmond Fed Manufacturing Index. New Home Sales come out on Wednesday with Durable Goods on Thursday. On Friday the markets are closed and we get the final reading on 4th quarter GDP.
Interest Rates & Commodities
The yield on the 10 Year T-Note dropped last week to 1.871% after yields came close to 2.00% the prior week. The downtrend is still intact but the weekly studies do not currently favor a break below the major support in the 1.691% area.
Crude oil was down on Friday but had another good week as the near term 38.2% Fibonacci resistance at $40.16 was overcome. The downtrend (line a) was broken two weeks ago. The 50% resistance level stands at $44.49.
The weekly on-balance-volume (OBV) moved above its WMA three weeks ago but did not form any positive divergences at the lows. It is still below the major resistance at line b. The weak volume unfortunately kept me on the sidelines as I was looking for a pullback to buy. There is initial support at $38.50 with the 20 day EMA at $36.55. I continue to expect a sharp pullback in crude oil over the next few weeks.
The Dow market averages led the market higher last week with the Dow Transports up just under 5% followed by a 2.3% gain in the Dow Industrials and a 1.8% rise in the Dow Utilities. These more narrowly based averages did much better than the S&P 500 which was up just 1.3%. The S&P’s gain was matched by the small cap Russell 2000. In last week’s column A Bear Market Rally or More? I again outlined the reasons why I thought this was more than a bear market rally.
It was another week of strong market internals were strong as there were 2271 advancing stocks on the NYSE while 907 stocks declined . The ability of the NYSE A/D line to move above its WMA on February 26th was a very bullish signal that most did not recognize. There are still many who are fighting the rally as one media analysts commented that he would not give up his short positions until the S&P 500 closed above 2070. This would be a move of 14.3% from the lows which is a long ways to fight a losing trend.
In my February 23rd article ” Don’t Follow Those Bearish Traders” I urged both investors and traders not to guide their investments or trades based on the views of the media analysts who were uniformly bearish at the time. I was my hope that my readers would see the wisdom of doing their own analysis and concentrate on the technical tools that I use in my articles and teaching sessions.
Most regular investors are still much more positive than they were a month ago even though the latest survey from AAII showed a surprising 7.4% drop in the bullish % to 30% while the neutral% rose to 43.2%. The VIX or so called “fear index” has continued to decline as it dropped below 15 on Wednesday. This low level of fear and the declining put/call ratios are signs of a market that may be getting complacent.
The weekly downtrend in the NYSE Composite (line a) was decisively overcome last week as it is now close to the 61.8% Fibonacci retracement resistance at 10,362. There is even stronger resistance in the 10,649 area , line b. There is weekly support now in the 9800-9925 area and the 20 week EMA.
The sharp rally in the A/D line and the move above its downtrend (line c) and the December 2015 highs is a sign of strength. The A/D line is now quite a ways above its rising WMA which makes a pullback more likley. It was also a good sign that the lagging OBV is now very close to making a new all time high, line d.
The sharply rising A/D line is the best environment for stock pickers as while the % of stocks above their 50 day MA has increased there are still stocks that are now just completing bottom formations. Profits in INTC and ROST were taken by Viper Hot Stock clients and these stocks ADSK, AKAM, INTU, DY, EEFT, USCR, VRSK,LMCA, NFLX and YHOO all gave new buy signals after Wednesday’s close. They all rallied sharply late in the week.
The Spyder Trust (SPY) added further gains last week but is still below the major chart resistance and the daily starc+ band in the $206.60-$207 area. The SPY formed a doji on Friday, which is a sign of indecision and a daily close below $203.80 will generate a short term sell signal. There is first good support now in the $200 area with the 20 day EMA at $199.27. This is 2.5% below Friday’s close and there is much stronger support in the $194-$196 area.
The S&P 500 A/D line first surpassed its downtrend, line b, on March 7th and has accelerated above it over the past two weeks. This resistance goes back to the all time high in the A/D line from May 2015 which has not yet been overcome.
What to do?
The fact that the S&P 500 has reached the 2050 level has clearly changed the outlook of many Wall Street professionals. Some are now feeling they have to be buying and some are starting to worry about their quarterly performance.
The extent of the rally and the divergences in some short term indicators like the McClellan oscillator makes me believe a correction is becoming more likely in the next few weeks. Therefore Viper ETF clients have been scaling out of longs in XLB and XLU while traders took profits in DIA. There are a number of ETFs that look positive based on the weekly analysis but they need a pullback to generate an entry point.
For the past few weeks I have also suggested that those investors who wanted to reduce their stock holdings after the January drop should adjust their holdings on strength. On the other hand those who want to become more fully invested should view a 1 or 2 week decline as a buying opportunity.
Editor’s Note: If you like Tom’s analysis he will be teaching a three hour interactive course “The Secrets of Volume” to a very small group of clients in April. If you are interested in learning about volume send an email to Volume Analysis at firstname.lastname@example.org and you will be sent more information.
It was another strong week for the stock market even though there was little US economic data the positive momentum from the past three weeks pushed stocks even higher. The further easing by the European Central Bank on Thursday was initially discounted as the Dax surged to new rally highs but then closed on the lows as it had a 500 point range. By Friday morning the bullish argument had won out as the Dax again moved sharply higher.
The comments from the International Energy Agency (IEA) that crude oil prices may have “bottomed out” gave the market a further boost early Friday. Now while this is clearly a short term positive it should be pointed out that they do not have a great record in forecasting oil prices. In 2014 they were looking for crude to be over $100 per barrel the next year.. Of course in 2015 crude never made it over $63 per barrel and closed the year at $38.
The sentiment certainly has seen a major shift in the past month which may be due in part to the firming oil prices which has lessened the fears of a credit default crisis in the energy companies. According to AAII the bullish % rose 5.4% to 37.4% in the last week, up from 19.4% just five weeks ago. The bearish% is now at 24.4% just about half of where it was five weeks ago. I think the bullish% could move to the 45-50% and it is now just barely below the long term average of 38.6%.
Many are now wondering whether the rally from the February lows (The Week Ahead: Is There Blood In The Streets Yet? ) is just a bear market rally that will soon lead to another wave of selling or whether the market has resumed its major uptrend.
Many who feel we are in a bear market point to how long the current bull market has lasted. This table from the WSJ reveals that our bull market is currently the third longest at eighty-four weeks as the bull market from 1949 to 1956 lasted eight-six weeks. The 1990 to 2000 bull market is still by far the longest. Of course many have been making this argument for a few years and will be right at some point .
One of the other primary arguments is that the US stock market is overvalued. From a recent article “Is the S&P 500 Overvalued” “The S&P 500’s current P/E is 21.5 and its Shiller P/E or CAPE (cyclically adjusted P/E) is 24.66. Both numbers are well above their respective historical averages and widely cited, in particular the Shiller PE, as proof the S&P 500 is overvalued. Even the forward-looking forward P/E of the S&P 500 is above average. It’s currently 15.7 versus a 10-year average of 14.2. ”
Of course I look at the market technically and the last major bear market rally occurred in March 2008 as the NYSE Composite dropped back to the January lows before it turned higher. The NYSE A/D line did make new lows in March, line b, before it began to rally. The five month downtrend (line a) was broken on April 18th. This confirmed a new uptrend in the A/D line, line c.
Once a rally was underway the key resistance was the 61.8% Fibonacci retracement resistance at 9602.33. On May 19th the NYSE had a high of 9687 but then closed at 9602.80. It dropped over the next two days to close over 2% below the 5/19 closing level. The NYSE Composite closed the week below the prior week’s low and this reversal was a sign of weakness. After a brief bounce the A/D line turned lower decisively breaking its uptrend, line c, which confirmed that the rally was over.
The AAII bullish% dropped to a low of 19.6% on January 10th 2008 and then had a secondary low of 20.4% on March 13th. In early May the bullish sentiment recorded two consecutive readings of over 50% with readings of 53.2% and 52.8% on May 1st and May 8th. The bearish % hit its low of 22.5% on May 8th. Just six weeks later the bearish% was again well over 50%.
The NYSE Composite closed last week above the 50% retracement resistance at 10,087 that is calculated from the May 21, 2015 high of 11,255. The downtrend from the June-November highs, line a, is at 10,150-200 while the 61.8% resistance is at 10,362. Two consecutive daily closes above this level would clearly be a positive for the intermediate term trend.
Clearly the chart shows strong resistance in the 10,500-10,700 area. The short term downtrend in the NYSE A/D line (line d) was broken in February confirming the new uptrend. The NYSE has rallied 5.7% since then. The longer term downtrend in A/D, line c, was broken last week as it accelerated to the upside overcoming the November-December highs. The A/D line is well above its rising WMA but the width of the gap indicates the market is now overextended .
The weekly chart and technical studies (see Market Wrap) do favor a change in the intermediate term trend. After a market pullback we should see another push to new rally highs. As I have been discussing over the past few weeks the technical damage from the severe January drop means that the market will need some time before it can challenge the 2015 highs.
It is still my opinion that the bull market has resumed and that this is not just a bear market rally. I see no signs of an imminent recession but it will be important that the economic data improves in the coming few months. It would take a sharp weekly downside reversal in the next few weeks and an extended decline in order to alter this outlook.
One of the concerns I have about the market is based on my sector analysis as not all sectors have performed equally since the February lows. My weekly scan, that is sent out each Monday to Viper ETF subscribers, shows that only two sectors, the Utilities Sector Select (XLU) and the Consumer Staples Sector Select (XLP) are positive based on the monthly as well as the weekly RS and OBV analysis.
The shading on the chart reveals the changes from the previous period as the weekly OBV on the Consumer Discretionary Sector Select (XLY) turned positive with the close on March 4th. Both the weekly RS and OBV has also turned positive on the Energy Sector Select (XLE).
It is also important to note that the monthly OBV on the Health Care Sector Select (XLV) turned negative in February. The weekly studies will improve this week but are unlikely to turn positive. The monthly OBV on the Industrial Sector Select (XLI) did turn positive last month.
If the market continues to move higher the XLV may reverse to positive as it has been one of the best moneymakers over the past four years. In hindsight I should have jumped on the energy sector last week but was not convinced that a major low had been completed. Subscribers are still holding longs in the XLP, XLU, XLB, DIA, and XHB but have started to take profits on strength as the overall market risk is betting higher.
The focus this week will be on the Bank of Japan which starts to meet on Monday and the FOMC meeting that begins on Tuesday. The FOMC has their announcement on Wednesday afternoon.
The PPI is out on Tuesday along with Retail Sales, the Empire State Manufacturing Survey, Business Inventories and the Housing Market Index. Then on Wednesday we have the Consumer Price Index, Housing Starts and Industrial Production.
On Thursday we get the important Leading Economic Indicators (LEI) and the Philadelphia Fed Business Survey , followed on Friday by quadruple witching and Consumer Sentiment.
Though there are signs that inflation may be picking up in the US there world economies are more worried about deflation. Consumer prices in the Euro zone are still in a well established downtrend and will take some time before they could bottom out. The specter of deflation helps to justify the ECB’s aggressive easing action last week.
Interest Rates & Commodities
In early February ” Is This The Stock Market’s Secret Weapon?” I alerted investors to the fact that the dollar index had completed a weekly top formation. After the expected oversold bounce back to resistance at line b, it now looks as though the downtrend has resumed.
A drop below the February low at $95.28 will indicate a decline to the 38.2% Fibonacci support at $92.42 while the weekly starc- band is a bit higher at $93.25. There is more important chart and the 50% retracement support in the $90.00 area. The weekly on-balance-volume (OBV) just rallied back to its declining WMA on the recent rally and continues to look weak. There is key OBV resistance at the downtrend line c.
There are now some signs that the Fed is in favor of a weaker dollar and as I noted in February it would have a positive impact on the global economies as well as corporate earnings. The yield on the 10 Year T-Note jumped last week to 1.977% up from the prior week’s close at 1.883%. The next major resistance in terms of yield is in the 2.10%-2.20% area.
The weaker US dollar has fueled a further short squeeze in crude oil as according to the latest COT data the short position dropped by 16% in the latest reporting period. Since the data is collected as of Tuesday’s close it has likely dropped even further as crude gained $2.58 per barrel last week. There is next chart and retracement resistance in the $40 area and I continue to believe that a 1-2 week pullback is needed before a bottom will be completed.
The Comex gold futures closed the week lower and formed a doji so a close this week below 1238 will trigger a sell signal. A drop to the $1190-$1200 area would not be surprising and should reduce the too high bullish sentiment. Such a correction would likely create a good buying opportunity.
It was another week of solid gains with the Dow Utilities leading the way up 2.2% followed by a 1.2% gain in the Dow Industrials and 1.1% for the S&P 500. The small caps and Transports lagged last week as they were up just over 0.5%. Once again the market internals were strong as 2087 stocks advanced and just 1104 declined.
The Spyder Trust (SPY) after exceeded the 61.8% Fibonacci retracement resistance a week ago and settled Friday well above the 200 day moving average at $200.74. The daily starc+ band is at $205.57 with chart resistance from the November-December high, line a, at $207.50. There is initial support now at $197.38 which was last week’s low with the rising 20 day EMA at $196.68. The daily starc- band is at $194.80.
The weekly S&P 500 A/D line has closed for the second week above the resistance (line b) from the all time highs. This is a bullish sign for the intermediate term trend and is consistent with an important bottom at the February lows. The A/D line is well above its rising WMA and a pullback to the WMA should create a good buying opportunity.
The weekly OBV has been above its WMA since late February and its WMA is now clearly rising. The daily OBV has started to rise more sharply and is now challenging the December highs as it is trying to catch up with prices.
Many of the beaten down technology stocks have had impressive rallies since the end of January. Last week I took a technical look at some of these stocks (Charting Barron’s Beaten Down Tech Stocks) to see which looked the best technically.
All are part of the PowerShares QQQ Trust (QQQ) which I screen weekly along with the IBD 50 for new Viper Hot Stock trading opportunities . The QQQ is up over 12% from the February lows but still below the 61.8% Fibonacci retracement resistance at $107.62. Once this level is overcome the January high is at $109.60 with the weekly starc+ band at $111.86.
For the third consecutive week the Nasdaq 100 A/D line is above its WMA but is still below the major resistance at line a, which is derived from the all time highs. A strong close above the November-December highs would be a bullish sign. The weekly OBV moved through its downtrend a few weeks ago and has now just surpassed its WMA.
The iShares Russell 2000 (IWM) has just made it back to its major 38.2% resistance with the 50% resistance at $110.65. There is initial support at $104.50-$105 and the 20 day EMA with stronger now at $103.
What to do? The close in the SPY above its 200 day moving average has been enough to shift the sentiment but many still think we are just seeing a bear market rally. My analysis suggests the intermediate trend has changed but one needs to keep an open mind to the market action over the next few weeks.
Many were quite skeptical about my comments on February 6th that “I do expect the SPY to be 5-10% above current levels before the end of the first quarter”. The rally has easily exceeded these targets and we still have two more weeks left in the quarter.
The FOMC meeting is likely to cause a pickup in volatility as even though I do not expect them to act on rates next week their comments will be fully dissected. If you have some nice profits from the four week rally I would suggests that you take them early in the week and I advised Viper ETF traders to take a 12.8% profit on their remaining longs in XLB on Friday’s open. A sharp selloff is real possibility next week as the market is vulnerable with the FOMC announcement.
If you were uncomfortable about your portfolios losses in January you should have recouped a good part of the losses on the rally. Therefore now might be a good time to reduce your exposure as while their are quite a few stocks that can be bought now most ETFs need a correction to create a good buying opportunity.
Stocks held up well on Monday and while the Spyder Trust (SPY) was up only slightly the A/D ratios on the NYSE were 2-1 positive. The S&P 500 A/D ratios were also strong and both A/D lines have continued to make new highs as they have surpassed the late December peaks.
The fact that the A/D line was leading prices higher was instrumental in identifying the February lows (The Week Ahead: Is There Blood In The Streets Yet?). The Spyder Trust (SPY has surpassed the 61.8% Fibonacci resistance from the early November highs and the NYSE overcame its retracement resistance on Monday.
There are were signs late last week that the market was forming a short term top but the overnight selling Tuesday was initially well absorbed. Just after the open Tuesday the sellers took over and a close in the S&P futures below $197.40 should confirm that a correction is underway.
In a Barron’s January 30th column “5 Battered Tech Stocks to Buy Now” they featured the above table and highlighted five stocks Autodesk, Akamai, Western Digital, Sandisk, and Lam Research as tech bargains.
Some of these stocks have had spectacular gains as Autodesk and Akamai are up 26% and 29% respectively over the past month. A look at the weekly chart and technical studies will help investors as well as traders determine whether these stocks have now made a major turn.
Autodesk (ADSK) made marginal new lows at $41.60 in early February before rallying sharply for the past four weeks.
- The resistance at $58.55, line 1, has now been reached with the weekly starc+ bands a bit higher at $60.07.
- There is additional resistance now at $63.16 with the upper boundary of the trading range, line a, at $65.96.
- The weekly relative performance did form higher lows, line d, in early February. The RS line is now well above its rising WMA.
- The weekly OBV also formed a positive divergence at the lows but has just made it barely above its WMA.
- The 20 week EMA is now at $53.56 with the 20 day EMA at $52.06. This represents a zone of good support.
- A daily close below $48 would be a sign that ADSK was ready to test the February lows.
Akamai Technologies (AKAM) formed a major weekly reversal in early February as after a low $39.43 it closed the week at $50.76. It has made little upside progress since as it is now bumping into its 20 week EMA.
- The weekly starc+ band is at $59.81 with much stronger resistance in the $63 area.
- The resistance from the triple top, line f, is in the $76 area.
- The weekly relative performance has moved above its WMA but is still below the long term resistance at line h.
- The weekly OBV moved above its downtrend, line i, and its WMA on February 19th.
- It will be important that the OBV holds above its rising WMA on a pullback.
- The daily studies are now slightly negative with retracement support now in the $49.76 to $47.76 area.
Lam Research (LRCX) is up just over 9% in the past month as it has just been holding above the 20 week EMA. There is major resistance in the $80-$81 area along with the weekly starc+ band .
- From the monthly chart the recent trading range looks to be part of a continuation pattern that favors an eventual upside resolution.
- The weekly RS line has been acting stronger than prices, line d, as it has just bounced from its WMA.
- A move in the relative performance above the resistance at line c, would be bullish.
- The weekly on-balance-volume (OBV) appears to have formed a double bottom, line e, before moving strongly above its WMA
- The OBV is already close to making a new high as it has acted stronger than prices.
- The daily chart reveals a sideways trading range so far this month with the 20 day EMA at $72.03.
- There is key support now at $67.91
Seagate Technology (STX) has been in a well established downtrend since early in 2015. It dropped to another new low in late January at $25.74 before rallying.
- STX has just made it slightly above its 20 week EMA with chart resistance next at $37.30.
- The weekly downtrend is now at $38.65 with the starc+ band at $39.23.
- The weekly RS line has just rallied up to key resistance, line h, that needs to be overcome to signal that STX is now leading the S&P 500.
- The longer term resistance for the relative performance is at line g.
- The OBV has been able to overcome the resistance at line i, which is an encouraging sign.
- It will be important to watch the OBV on any pullback.
What to do? The last of Barron’s bargain picks, Western Digital (WDC) has had a very weak rally as it is still well below its 20 week EMA $54.62. Of the other stocks on the list; Micron Technology (MU), NetApp (NTAP), eBay (EBAY), Cisco Systems (CSCO), Yahoo! (YHOO) and Nvidia (NVDA) all appear to have had rebounds with their downtrend. They should be watched as the market corrects.
Of the four stocks Lam Research (LRCX) looks the most interesting technically and I will be looking for a good entry point as the market corrects. LAM as well as these tech stocks are part of my weekly scans for my Viper Hot Stock Report where I give specific trading advice on the Nasdaq 100 and IBD Top 50 stocks
The stock market recorded another nice week of gains as the burst of upside momentum was needed to confirm the February bottom (The Week Ahead: Is There Blood In The Streets Yet? ) as the major averages are now back to more important resistance. Some may forget that just three weeks ago the S&P 500 hit 1810 and it has now moved above the 2000 level .
Most have not forgotten the angst of the January drop in their stock portfolios and while those that held on have now recouped some of their losses those who sold during the decline are now facing a tough decision. I was not expecting the extent of the stock market drop at the start of the year but the technical readings and very negative sentiment by January 15h convinced me that selling into the decline was not the best strategy.
A week after the January lows I was looking “for a rally to the $198-$200 area”. I had concluded that ” the recent drop does not seem like the first phase of a new bear market” and that stabilization ion crude oil should help fuel a significant rebound. It is important for investors to remember that after the 21.6% correction in 2011 the S&P 500 took six months before it again made new highs. Patience is still a key trait of successful investors.
Ever since the NK225 topped in 1989 I have urged investors to regularly follow the major overseas stock markets even if they are only investing in the US stock market. For more active investors the country specific ETFs that I monitor for the Viper ETF clients often offer some good profit opportunities. Several of these ETFs have now given intermediate term buy signals and I will be looking to recommend them on the next correction.
In today’s column I will look at the technical outlook for three of the key global stock markets. Since the June 2012 low the Dax Index has typically been stronger than the S&P 500 on the rallies and has often topped out before the S&P. From the October 2014 low the Dax Index gained 48% before topping out in April 2015. The S&P 500 rose just 17.2% from the October 2014 low and peaked in May, a month after the Dax .
From the April 2015 high to the February lows the Dax has dropped 29.8% as the decline has been much worse than that of the S&P 500. Never the less the Dax appears to be holding above the major 50% retracement support from the 2011 lows at 8663. The weekly chart shows a well defined trading channel, lines a and b, as the lower boundary was almost reached on the last drop.
The weekly MACD-His has formed a potential bullish divergence as it has formed higher lows, line c, while the Dax has formed lower lows. In order to confirm the divergence and to signal an important low the MACD-His needs to move above the late 2015 high (key resistance on chart). The Dax has major resistance now in the 10,500-11,000 area.
Since Japan’s Nikkei 225 peaked in 1989 their economy and stock markets have been a good example of how hard it is to overcome deflationary pressures. The weekly chart shows that the NK225 broke out in 2014 and rallied up to the 21,000 level last August before it topped out.
The 38.2% support from the 2009 low at 15,605 has been reached with the more important 50% support at 13,969. Unlike the Dax the NK225 dropped below the lower boundary of the trading channel, line b, in early February. The next key resistance is at 18,000 with the downtrend, line a, in the 19,200 area.
The MACD-His buy signal in late 2015 was not impressive as it just barely moved into positive territory before reversing to the downside. The MACD-His did not make new lows, line c, as the NK225 was making its low. The MACD and signal lines are acting much weaker as they have made sharply lower lows. Therefore the potential bottom in the NK225 is not as strong as that of the Dax.
The Hong Kong Hang Seng Index peaked at the end of May and though it formed a bottom in October the rally was weak. The Hang Seng just made it back to the 38.2% Fibonacci resistance before the decline resumed. There is first resistance now in the 20,300 area which was the October low. There is more important resistance at 23,350 ( line a) that needs to be overcome to confirm a new uptrend.
Just as was the case with the other global indices, the MACD-His on the Hang Seng has formed higher lows, line b. It is close now to moving into positive territory but must overcome the highs from late 2015 to confirm that a weekly bottom is in place.
These key global markets in my opinion are not sending any warnings of an imminent crash but of course they will need to be monitored if they rally back to resistance. As I discussed last week ” The Week Ahead: Should Investors Ignore “The Wall of Worry”? I feel the investor fears over the Chinese economy are overblown. The ECB is likely to take more steps at their next meeting to stimulate the Euro zone economies and the analysis of their stock markets does look constructive.
The strong jobs report last Friday and the evidence that new job seekers are entering the markets is a sign that the confidence in the economy is strong. This is in contrast to the headlines proclaiming an ongoing or imminent recession.
The evidence of new workers coming into the market is based on the labor participation rate that has finally started to increase. The steep downtrend, line a, may now have been broken. However the rate has been declining since 2008 as it hit a 39 year low in October. A monthly reading above 63.2 would be a more convincing sign that this trend has changed. This combined with the hints of increasing inflation mentioned last time is an overall positive for the economy.
Last week started off with more disappointing news as the Chicago Purchasing Managers Index (PMI) dropped to 47.6 after the strong reading of 55.6 in January. This survey covers both the manufacturing and non-manufacturing companies. It still was better than the continually weak Dallas Manufacturing Survey as it only improved slightly last week to -8.5. The Dallas and Kansas City regions have borne the brunt of lower crude oil prices.
The PMI Manufacturing Index came in as expected on Tuesday at 51.3 but the ISM Manufacturing Index rose to 49.5 which was higher than the past three months. This may have broken the downtrend, line s, but it is too early to be confident.
The data last Thursday on the services sector was pretty much as expected as PMI Services Index came in a 49.7 which was about the same as the flash reading but down from 53.2 in January. The ISM Non-Manufacturing Index at 53.4 was just above the consensus estimate of 53.1. It is still holding well above the key 50 level.
Factory orders were up 1.6% which was stronger than expected but it was consistent with the recent sharp increase in Durable Goods. Though this is encouraging so far the early data on manufacturing has not been impressive.
Interest Rates and Commodities
The yield on the 10 Year T-Note has risen sharply since it closed on February 19th at 1.748% and came very close to the long term support from 2013 in the 1.691% area (line b). The yield looks ready to close the week at 1.897%. The 20 week EMA is now at 2.010% which represents strong resistance. The long term downtrends is still much higher at 2.50%.
Crude oil has had another good week as it has now reached the downtrend on the weekly chart, line a. The former support from 2015, now resistance, is in the $37.80 area, line b. The sluggish nature of the recent rally has not been accompanied by any strong volume as the OBV has just now moved above its WMA. The HPI has moved above its downtrend, line c, but is still below the zero line where the rally failed last October.
The pullback in gold and the gold miners from the recent highs has been very shallow and it did not present any good risk/reward opportunities. Both GLD and GDX have held well above their first support levels which meant that very wide stops needed to be used on new long positions.
The third week of solid gains has clearly started a shift in the prevailing bearish sentiment. Less than two weeks ago trader sentiment was decidedly bearish (Don’t Follow Those Bearish Traders) as the focus was on selling the rally. Now the discussion seems to be on what sectors investors should buy..
The small cap Russell 2000 led the way gaining 4.3% followed by a 3.6% gain in the NYSE Composite and another solid 3.3% rise in the Dow Transports. More importantly the market internals were again strong on a weekly basis with 2723 issues advancing and just 461 declining.
The NYSE Composite closed well above the 20 week EMA as our initial upside target was reached. The downtrend, line a, is now at 10,100 with the weekly starc+ band at 10,311. There is more formidable resistance in the 10,400-10,650 area.
The weekly NYSE A/D line has improved even further after overcoming its WMA last week. The major downtrend, line c, is now being tested and a move above the November highs would confirm a new uptrend. It is encouraging that the WMA of the A/D line is now trying to turn higher. The weekly OBV is also now back above its WMA. The 20 day EMA is at 9615 with the monthly pivot at 9395.
The Spyder Trust (SPY) overcame the 61.8% Fibonacci resistance at $199.18 as it closed above the $200 level and the monthly R2 pivot resistance. The daily starc+ band is at $203.18 with the weekly starc+ band and the trend line resistance is in the $206.50 to $207.42 area.
The daily resistance from the November- December highs (line b) in the S&P 500 A/D line was overcome last week. As I noted two weeks ago it has started to accelerate to the upside. It is still acting strong but is now well above its rising WMA. The bullish divergence in the A/D line at the February lows (line c) helped identify the market bottom. The OBV is above its WMA but still lagging.
The SPY is over 3% above the 20 day EMA at $194.38 with the daily starc- band at $193.94. The current 50% retracement support is at $191.54 with the monthly pivot is at $190.44.
The iShares Russell 2000 (IWM) tested its daily starc+ band on Friday and is also looking a bit overextended after the recent strong rally. The PowerShares QQQ Trust (QQQ) did not make much upside progress late in the week and formed a doji on Friday. Its 20 day EMA and has first support is at $103.10.
What to do? The very strong jobs report and powerful stock market gains last week have clearly gotten the market’s attention. The major averages have reached the upside targets that I outlined at the February lows and some of the daily starc+ bands were reached at the end of the week. The stock market gains last week were supported by strong A/D ratios which was needed to signal that the rally had gained strength.
Several of the ETFs that I have recommended to Viper ETF clients have reached near term targets where traders have taken short term profits. As the market has become more overextended we have become less aggressive buyers and are now looking for a pullback so that investors or traders can add to their long positions.
The fact that the weekly A/D lines have now overcome their major downtrends supports my favored scenario that the January drop was a bull market correction not the start of a new bear market. We will get a clearer picture in the next few weeks and on the first pullback will tell us more.
I think it is important to realize that even if an major low was completed at the February there was significant damage done by the market’s decline. It will take time for the market to heal and makes it increasingly likely that we will see a 1-2 week correction in the next month or so.
For investors who panicked and sold during the decline this weekly setback should be the best opportunity to get back into the market. For those who decided to reduce their stock exposure on the rally I recommend that you do not react hastily to last week’s action . Take the time to reconsider what level of stock market exposure will allow you to weather the inevitable steep market corrections in the future.
In reviewing my weekly scan of the stocks in the Nasdaq 100 and those in the Investor’s Business Daily Top 50 over twenty stocks have generated new weekly buy signals. For Viper Hot Stocks clients these stocks will be reviewed over the weekend to find new buy candidates for this week.