The Week Ahead: Potholes on the Value Path
The stock market had its biggest one-day drop since February on Thursday as the disappointing earnings from Apple (AAPL) and a weak 1st quarter advance reading on GDP added to the overnight selling pressure. The futures had dropped in reaction to the lack of BOJ action. After the close Thursday the market got a positive surprise as Amazon.com (AMZN) and LinkedIn (LNKD) both beat earnings in impressive fashion.
It appears that some traders had apparently bet heavily on more easing by the BOJ so the unwinding of these large new long positions likely accentuated the selling. The strength of the Yen has many nervous but the BOJ could change their minds quickly and decide to ease further.
For many traders the failure of the S&P 500 to close above 2100 the previous week was a reason to turn more bearish. My argument from last week’s column “A Bull in Sheep’s Clothing?” was that the new bull market highs in the NYSE and S&P 500 A/D lines as well as the low level of public participation in the stock market were not consistent with a significant market top.
One of the questions facing many investors is whether they should invest based on the basis of value or growth. The bear market in 2008 caused the ruin of many value investors as most do not use technical analysis and do not use stops on their positions.
Some well know newsletter writers recommended the big banks like Bank of America (BAC) and Citigroup (C) in 2008. The lack of risk control and the failure to use timing their entries or exits is the weakness of value investing. Hard stops are recommended in both the Viper ETF Report and in Viper Hot Stocks
Bank of America (BAC) was down 60% in 2008 while Citigroup ( C) was even worse as it lost over 73% so stops would have helped the value investor. The Spyder Trust (SPY) lost just 36.8% in 2008. Legendary value investor Bill Miller beat the market for an impressive 15 years in a row. In 2008 his heavy exposure to the financial stocks pushed two of his funds down 55% and 65% respectively.
He is still a force in the mutual fund industry as he “made big bets on airlines in 2008, 2010 and 2012” according to a Bloomberg article in 2014. He was way ahead of the curve as they were stellar performers in 2013 and 2014. Delta Air Lines (DAL) was up 46.7% in 2012, 132.4% in 2013 and just over 80% in 2014.
DAL was up 4% in 2015 but is down double digits in the past month. As a technical analyst it is my view that the fundamental data lags the price action and so by the time the data shows that a stock is no longer undervalued it has often already have topped out.
Bill Miller still liked the airlines as of early February but the weekly chart shows a broad trading range, lines a and b, which is likely a top. The relative performance analysis for DAL has been dropping for the past five weeks as it has been moving lower while the market is moving higher.
The RS line broke important support, line c, at the start of April and the stock has lost 11% since that occurred. The OBV reversed back to negative three weeks ago and looks ready to break important support (line d) this week. From the chart above the next reasonable stop for DAL is at $39.90 and the completion of the trading range would project a drop below $30.
The absurdity of trying to assess the value of a stock came to light Thursday afternoon as two CNBC traders debated the merits of Amazon.com (AMZN) after it jumped 12% on their earnings. One trader was not impressed by the stock as it believed it was now fully valued. The other trader wondered how AMZN could be fairly valued now when it was not considered undervalued before it rallied on the report. A look back at the similar discussion in 2015 indicates their views on the stock have not changed.
The two-month drop in AMZN did not alter the long term uptrend as the rising 20 month EMA was just tested. The rebound in March caused the OBV to rally from its rising WMA and the monthly RS line made a new high in late 2016.
As I noted on March 31st “The weekly on-balance-volume (OBV) on AMZN also made a new high with prices and will flip back above its WMA this week. This is a bullish sign.” I would not be surprised to see a move to the starc+ band at $774 in the next 2-4 months. As far as stops one would not want to see AMZN drop below the April low of $594.
So what’s the answer? I think those who feel confident about finding undervalued stocks must also use stops and technical analysis to time their buys and sells. The volume and relative performance analysis can identify when an undervalued stock has bottomed.
Besides the earnings surprises from both Apple (AAPL) and Amazon.com (AMZN) the other big news for the week was the strong action in gold as the futures were up over $66 for the week. The close was well above the March highs with the monthly starc+ band and pivot resistance at $1327. The monthly charts shows converging resistance, lines a and b, in the $1380 area. There is major resistance at $1500.
My examination of both the weekly and weekly volume however does not convince me that this is the start of a major new uptrend as some are suggesting. The monthly OBV has not yet moved above its WMA or the March highs and is not confirming the breakout. In a strong market the OBV should be leading prices but the volume in the gold futures was lower than it was in March.
The monthly Herrick Payoff Index (HPI) is above the zero line and has reached the highest level since 2014. The weekly and daily HPI have not yet confirmed the new highs. The rally in the metals was helped by the sharp drop in the dollar index. As I noted last week there were some signs of a bottom on the daily charts but the drop to new lows has turned the daily analysis back to negative and it again agrees with the weekly analysis.
Other than the weak advance reading on 1st quarter GDP which showed just a 0.5% growth the economic data was not too bad. The initial reading for the 1st quarter of 2015 was also weak but the numbers did get better as the year progressed.
The New Home Sales on Monday were about as expected as inventory remains low. The Dallas Fed Manufacturing Survey was positive for the second month in a row. March Durable Goods were positive as defense goods were up while commercial plane orders were down. The S&P Case-Shiller HPI was positive Tuesday but was not impressive and the PMI Services Index came in at 52.1 as expected.
The Consumer Confidence came in at 94.2 was a bit weaker as the expectations for the future fell in April. Friday’s Consumer Sentiment at 89 was also weaker than the expected 90.4 but Wednesday’s Pending Home Sales were a bit higher than expected.
Last Friday’s Income and Outlay data indicated that “Spending is weak but income is solid” as the income trend has been positive all month. The Employment Cost Index indicated that wages are driving up costs in the 1st quarter which could bode well for the next few months. The Chicago PMI fell in April but it is still in a gradual uptrend so I will be watching the May numbers.
After this week’s reading we should get a better idea on whether the economy is really getting stronger. The PMI Manufacturing Index and ISM Manufacturing Index are out on Monday along with Construction Spending.
On Wednesday we get the ADP Employment Report along with Factory Orders as well as the PMI Services Index and PMI Non -Manufacturing Index. On Friday we get the monthly jobs report.
Interest Rates & Commodities
The FOMC announcement was dissected by the Fed watchers but it did not move rates much. The yield on the 10 Year T-Note dropped to 1.819% from the prior week’s close of 1.897% and is still locked in both their short and long-term trading ranges. The May jobs report could move the needle but it would take a few weeks before they could breakout.
It was another good week for crude oil as the June contract gained $2.19 for the week and was up near 20% for the month. The daily chart shows that a doji was formed on Friday near the trend line resistance at line a. Prices were in a wide range on Friday but closed near where they opened the day. The weekly studies are still acting strong but most are still quite overextended.
The daily OBV has formed a negative divergence, line c, as it peaked on April 13 when crude also formed a doji. The HPI has also not confirmed the recent price action but is still well above zero line and its uptrend.
The energy stocks had a great month as the SPDR S&P Oil & Gas Exploration (XOP) was up 17.8% for the month. The monthly pivot resistance at $36.84 was exceeded last week and Viper ETF traders sold 50% of their longs for over a 20% profit. The weekly chart shows that long-term resistance so a pullback would not be surprising. There are further upside targets in the $38-$40 area.
The weekly relative performance completed its bottom over a month ago signaling that it was a market leader. The weekly OBV is acting much stronger than prices but is quite far above its rising WMA. There is first good daily chart support in the $31-$32 area.
Both the Dow Industrials and S&P 500 both lost 1.3% for the week as it was the worst performance since early February. It was the second rough weak for tech stocks as the Nasdaq Composite fell 1.9% for the month. The drop late in the week did cause a significant uptick in bearish sentiment with “Sell in May” back in the headlines.
The earnings reports are still playing a major role in the daily market swings as with over half of the S&P 500 already reporting the per share earnings are down 6.7% according to Fact Set. This is better than was expected before the earning’s season.
The weekly chart of the NYSE Composite shows that it came close to the next major resistance last week (line a) The 20 day EMA at 10,384 was tested Friday with weekly support starting at $10,200-300 area with the rising 20 week EMA at 10,093.
The advancing and declining stocks were pretty much even last week and the weekly NYSE A/D line has flattened out after making convincing new bull market highs. The WMA of the A/D line is rising strongly and represents important support, line b. The weekly OBV made a new high last week and reached trend line resistance, line c, before turning lower.
The Spyder Trust (SPY) dropped below the daily starc+ band on Friday as it had a low of $205.03 before it rallied in late trading to close at $206.33. This was just above daily support at line b. For May the monthly pivot is a bit higher than the close at $206.78 with monthly pivot support at $202.64. A close back above the $209.81 level is needed to reassert the uptrend with resistance at $210.40-$211.78.
The S&P 500 A/D line has pulled back to its WMA and has more important support at line c. A drop below its WMA and flattening in the WMA will typically precede a more serious correction. The OBV does look a bit weaker as it has dropped below its WMA and now has important support at line d.
The daily technical outlook for the PowerShares QQQ Trust (QQQ) is considerably weaker than that for the SPY. The QQQ hit the starc- band on Friday and is now well below its declining 20 day EMA at $108.58. The monthly pivot for May stands at $107.35.
The quarterly pivot is at $104.74 and a weekly close below this level will signal a trend change. The monthly pivot support and the chart support is now in the $103-$103.25 area. There is more important support in the $99-$100 area.
The Nasdaq 100 A/D line dropped below its uptrend, line b, and its WMA last week. This suggests that a top is forming but a bounce is still likely over the short term. The OBV has also broken its support at line c, which is a sign of weakness.
What to do? The action last week turned the stock market outlook mixed as while the NYSE, S&P 500, Dow Industrial and Russell 2000 A/D lines have not broken support the Nasdaq A/D line has now topped out. This cannot be ignored as it looks as though the tech sector is giving us an early warning sign.
That does not mean the market is going to drop sharply right away as it typically will take a week or more for the market to rebound back towards the highs and complete a top. Such a rally should be accompanied by more warning signs from the other averages.
The action suggests that the sharper market correction may happen a bit sooner than I thought just a week ago. The weekly A/D lines for the broader averages indicate that a deeper correction will provide a better opportunity for long-term investors. More nimble investors and Viper ETF clients who have made some nice profits on the rally from the February lows should start taking profits on the next rally and use tighter stops.