It was not surprising that stocks sold off on Monday morning after a tumultuous weekend. What was interesting was that as the major averages were making their lows for the day the NYSE advance/decline numbers revealed that there were not that many more sellers than there were buyers.
By the close of trading, even though the S&P 500, Dow Industrials and NYSE Composite closed the lower there were more advancing then declining stocks. This was a positive sign that hinted at the market’s strength on Tuesday.
The financial media has turned more cautious on the stock market in January and last week according to AAII the bullish% dropped 6.6% to 37% consistent with waning enthusiasm over the Trump rally. I think this may change this week as Tuesday’s action, with almost 3-1 positive market internals, indicates that the election rally may be ready to continue.
As the Spyder Trust (SPY) has been moving sideways and the iShares Russell 2000 (IWM) has been declining some ETFs have had nice gains. The weekly relative performance analysis from Viper ETF has been positive since last November for both the SPDR S&P Metals & Mining (XME) and First Trust Dow Jones Internet (FDN). They are up 8.8% and 6.1% respectively in 2017.
In Tuesday’s trading there were strong moves in both the iShares US. Home Construction (ITB) and SPDR S&P Homebuilders (XHB) but are these two ETFs now on the verge of becoming market leaders?
The SPDR S&P Homebuilders (XHB) has an expense ratio of 0.44% with 44 holdings. There is over 61% in the top ten with over 23% in D.R. Horton (DHI) and Lennar Corp (LEN ) that were both sharply higher on the day.
The weekly chart of ITB shows there is weekly resistance in the $30 area, line a. A strong move above this level will project a rally to the $33-$35 area.
- ITB traded in a tight range for the previous four weeks as it held the 20 week EMAS which is now at $27.70. These are often good buy setups.
- The weekly relative performance has broken its downtrend, line b and a close this week above the late 2016 high will complete the bottom.
- The weekly OBV is just barely above its WMA but volume Tuesday was double the daily averages.
- The daily OBV (not shown) does look strong and has broken out of its recent trading range.
The SPDR S&P Homebuilders (XHB) has an expense ratio of 0.35% with 35 holdings. The largest are Whirlpool (WHR), Mohawk Industries (MHK) and Home Depot (HD). This ETF has positions in many of the homebuilders but also contains a wide range of home furnishing stocks.
- XHB also gapped higher Tuesday and closed above the daily starc+ band.
- The December high is at $35.54 and the weekly starc+ band at $36.75. The resistance from 2015 is at $38.
- The daily RS has moved strongly above its WMA and is now close to its downtrend, line e.
- The daily OBV has moved above its downtrend, line f, on Tuesday as volume was well above average.
- The weekly OBV is positive as it is above its WMA.
Summary: On Tuesday the iShares Russell 2000 (IWM) closed strong Tuesday and a close above $137 will indicate its correction is over. This will provide a bullish boost for the overall market. It will take a another day or two of positive A/D to turn the Russell A/D line positive. Given the recent increase in bearish strategies, including the reportedly heavy buying of VIX calls, a new rally would catch many by surprise.
As for the iShares U.S. Home Construction (ITB) and SPDR S&P Homebuilders (XHB) the daily close above the daily starc+ bands indicates that they are now in a high-risk buy area. This typically means there will be a better risk entry in the next week.
If you would like specific buy and sell advice you might consider my Viper ETF Report which includes two reports a week and regular trading lessons. It is just $34.95 each month and can be cancelled on line at anytime.
This is a continuation of yesterday’s The Week Ahead: The Reagan Markets and it focuses on the markets to watch in the week ahead.
Interest Rates & Commodities
The yield on the 10 Year T-Note rose 0.87% last week after yields had declined for a month. There is more important support for yields at 2.20% (the yearly pivot) and the 20-week EMA at 2.185. The decline in yields has been part of the reason that bank stocks have been moving sideways for the past month.
The weekly MACD is still clearly positive and shows no signs yet of a top. The close last week above the prior week’s doji high has triggered a weekly buy signal.
Crude oil prices were barely higher last week but did hold above the prior week’s lows. The weekly OBV is still positive but a strong close now above the $54.32 is needed to turn the daily analysis positive. This would signal that the overall uptrend has resumed.
Gold prices have rallied sharply but while the weekly OBV on the SPDR Gold Trust (GLD) has not turned positive it does look stronger on the VanEck Vectors Gold Miners (GDX). A pullback in GDX therefore may create a good buying opportunity.
A majority of major averages, except the Dow Transport and Utilities, did close the week lower. The small cap Russell 2000 was hit the hardest as it was down 1.47% while the S&P 500 lost just 0.15%. The declining stocks led the advancers last week with 1868 down and just 1222 up.
The bullish sentiment according to AAII dropped 6.6% last week to 37% while the bearish % rose 5.7%. This is a positive sign for the market. The VIX declined sharply last week as maybe the recent put buyers that have been publicized in the press are now getting nervous. The VIX has short-term resistance not at 13.28 but a close above 15, line a, is needed to complete a short-term bottom. This would be consistent with a further correction.
The iShares Russell 2000 (IWM) made lower lows last week but it held just above the $133 level. The quarterly pivot and stronger support is at $129.52 with the clearly rising 20-week EMA at $129.16. The major breakout level and very important support is in the $125.80 area, line a.
The weekly Russell 2000 A/D line confirmed the early December high but has since been correcting. It is well above its WMA and the major support at line c. The daily A/D line (not shown) is still below its WMA and is in a short-term downtrend. This does allow for a further correction.
The Spyder Trust SPY) was higher Friday but still lower for the week as it held above the prior week’s low at $224.96. There is more important support at the late December low of $222.73 with the quarterly pivot at $220.08. Initial resistance stands at $227.40-$227.75 with the daily starc+ band at $229.44.
The daily S&P 500 A/D moved back above its WMA on Friday and unlike the Russell A/D line is now in a short term uptrend, line b. The weekly A/D line is holding near the all time highs and its WMA is still rising strongly.
The analysis of the Nasdaq 100 A/D line continues to look the strongest as does the price action of the PowerShares QQQ Trust (QQQ). The Dow A/D line looks similar to that of the Russell 2000 A/D line which adds to the split short-term outlook.
What to do? The analysis of the stock market in the Reagan years should prepares investors for the reality of wide swings over the next four years. This does not mean that there will not be gains with the new administration.
The intermediate term analysis of the stock market is still clearly positive so the only question is whether we will see a sharper correction before the market moves higher. The improvement in the economy is also a positive for the 1st quarter. A strong earnings season would help convince investors to buy stocks.
Despite the near term weakness I still would look for the small cap stocks to outperform over the next few months. I higher close this week with positive A/D numbers will indicate the Trump rally has resumed.
My technical review of the transportation stocks last week indicated that it is bottoming and could again lead the market higher. Viper Hot Stock traders took good profits on CSX and another long trade, Checkpoint (CHKP) was up 7% last week.
If there is a deeper correction it should be another good buying opportunity for investors. There are signs that the health care and the biotech stocks may again lead the market higher as their quarterly pivot analysis is positive.
If you would like specific buy and sell advice you might consider my Viper ETF Report or the Viper Hot Stocks Report . Both include regular Trading Lessons and are $34.95 each per month.
As the new president officially is sworn in the stock market is holding on to half of its early gains as of 1:00 PM New York Time. The background and experience of the president is much different than any other in modern history.
Many Republicans would like to compare him to President Reagan as they view it has the gold standard for Republican presidents. Other than their background in the entertainment industry there are many differences that they bring to the table. Nevertheless Reagan’s election did shake up the political landscape in 1980.
Some are hoping that the stock market will match the 113% gain the S&P 500 had during Reagan’s two terms. It is likely many of you were not in the markets thirty-six years ago so I thought it might be informative to take a technical look at the Reagan markets.
Many things were different in the 1980s especially interest rates. The chart shows that 10 Year T-Note yields were in a gradual up trend in 1977 through 1979 but then surged in late 1979 from 9.34% to a high of 13.75% in February 1980. Because of increasing inflation Fed Chairman Paul Volcker had started to raise rates. As the shaded period indicates the US economy officially entered a recession in January 1980.
Just four months later yields had dropped back to 9.63% in June as the economy improved and the recession ended, But then rates started to rise once more. As the 1980 election was taking place yields were back above 13% as they peaked in October 1981 at 15.75%.
The support on the yield chart going back to 1980, line a, was broken in November 1981 and yields quickly dropped back to 13%. It was the violation of this support, line b, in August 1982 that completed the top in yields and started the thirty-four year bull markets in bonds. The recession was officially over in October 1982.
The S&P 500 closed before the election at 129.04 and sixteen days later it had a high of 141.96 which was a gain of 10%. The S&P tried to rally in early 1891 but this rally failed and the S&P 500 continued to form lower highs.
The NYSE advance/decline line moved above its WMA in May 1980 and started a very strong uptrend. It peaked in September (point 1) and when the S&P 500 was making a new high in November the A/D line formed a negative divergence at point 2 as it just rallied back to its flat WMA. It subsequently dropped below the prior low which confirmed the negative divergence.
The A/D line moved back above its WMA in March but failed to move above the November a high which was a sign of weakness. The A/D line formed a lower high again in June (line a) before it started to drop sharply. The drop below the key support (line b) came just before a three week rally, line 3, which set the stage for the sharp six week plunge.
The A/D line formed lower highs in 1982, line c, which was consistent with a bear market. At the August 1982 low the S&P 500 has dropped 28%.
The NYSE A/D line moved above its WMA on August 20th and four weeks later it overcame the downtrend, line a, which confirmed the market bottom. The A/D stayed in a very bullish trend until July of 1983 as it gained 45% after the A/D line buy signal.
In October 1983 the A/D line formed a negative divergence as it failed to make a new high with prices, line b. This downtrend was not broken until early 1985 which was a strong signal that the market’s long correction was now over.
The new uptrend in the A/D line that connected the 1984 lows (line c) was not broken until early September of 1987. This negative signal occurred almost a month before the crash in October 1987. The A/D line had formed a significant bearish divergence before it broke support.
The weekly and daily A/D line analysis plays an important role in both my Viper ETF Report and the Viper Hot Stocks Report. It is used to help decide when to be a buyer or seller of both ETFs and stocks.
Many do not realize that according to the Federal Reserve on the Recession of 1981-1982 “Prior to the 2007-09 recession, the 1981-82 recession was the worst economic downturn in the United States since the Great Depression. ” It was of course exacerbated by the short recession in 1980.
One of the economic indicators that I follow very closely is the Conference Board’s Leading Economic Index. It has done a good job of topping out well ahead of a recession as this chart from dhort.com illustrates. It topped out fourteen months before the 1980 recession and 7 months before the 1981-1982 recession. It is still rising as of December and the latest data is out on January 26th.
The Fed tightening prior to and after the 1980 election was in reaction to the very high inflation which had pushed the yield on the 10 year T-Note to 15%. In another very interesting chart from dhsort excellent site is this monthly inflation chart from 1872 to the present. The peaks after WWII and in 1980 do stand out as does the trend of low inflation than has been in place for many years.
Gold prices topped out in January of 1980 as the bubble burst after prices hit a high $873 and by Election Day it had already dropped $200 from its high. The close this January is likely to give us more insight as to whether gold has bottomed.
It was another week of positive economic news as the year to year CPI to 2.1%. Crude oil prices were up for the fourth month in a row. Industrial Production was better than expected at 0.8% while the Housing Market Index which helped identify the bottom in the housing market over four years ago.
Last Thursday’s Housing Starts and the Philadelphia Fed Business Survey were also very strong which is consistent with an economy that continues to get better. As I noted last week the Philly Fed Survey has been in a strong uptrend.
This week we have the flash PMI Manufacturing and Existing Homes Sales on Tuesday followed on Thursday by the Chicago Fed National Activity Index, flash PMI Services and New Home Sales. On Friday we have Durable goods, the advance reading for 4th quarter GDP and Consumer Sentiment.
In the second half of the Week Ahead I discuss the markets including the A/D analysis that indicates the intermediate term trend is positive with no signs of a major top. It will be released by noon NY Time on Saturday .
Check here on Forbes to get my full analysis of the market on Saturday as I will tell you what to look for in the week ahead.
The stock market was lower in early trading Tuesday which supported the view of some that the Trump rally was over. By the close the Spyder Trust (SPY) was down just 0.35% and the NYSE advance/decline numbers were only slightly negative with 1354 up and 1657 down.
The daily A/D lines that were reviewed last week are still holding above support and have not moved into the corrective mode by dropping below the late December lows. Furthermore the Nasdaq 100 A/D line closed very strong last Friday as it has accelerated to the upside (see chart)
The earnings for CSX Corp (CSX) after the close had many wondering whether the major rally in the Dow Transports was over. The iShares Dow Transportation (IYT) was down 1% on Monday but is up 14% over the past three months. This is in contrast to the 7% gain in the Spyder Trust (SPY) but what is next technically for the Dow Transports?
The yearly pivot analysis, that was very accurate for the SPDR Dow Industrials and iShares Russell 2000 (IWM) shows that the yearly projected high for IYT is at $184.52 with the yearly pivot at $149.11. The 2016 close was well above the 2016 pivot at $140.49.
The iShares Dow Transportation (IYT) is down over 4% from the December 9th high at $170.79. The week ending January 6th IYT formed a doji and a weekly doji buy signal was triggered with last Friday’s close.
- The quarterly pivot is at $158.56 with the rising 20 week EMA at $156.33 and the starc- band at $155.76.
- The relative performance analysis (RS) reveals that IYT completed a bottom last fall versus the SPY indicating that it was a new market leader.
- The weekly RS has pulled back from the December high but is still well above its WMA. It has converging support at lines b and c.
- The weekly on-balance-volume (OBV) has held up very well after breaking through the major resistance, line d, in November.
- The OBV is well above its rising WMA and shows no signs of a top.
The daily chart of iShares Dow Transportation (IYT) shows a fairly orderly pullback from the December highs with the flattening 20 day EMA at $164.01.
- The recent low is at $161.58 with the 38.2% Fibonacci support from the October high at $159.54.
- The monthly pivot support is at $159.52.
- There is short-term resistance at $165.91 and a move above the last major swing high at $167.73 (see arrow) should confirm that the correction is over.
- The daily RS (relative performance) is trying to bottom out but needs to move above last week’s high.
- The daily OBV is holding above its WMA and the support at line e.
- If it this daily support is broken and the OBV starts a new downtrend it will signal a deeper correction.
Summary: The financial media is coming up with many reasons why the transportation sector will not benefit from Trump’s programs until later in the year. The technical outlook favors being a buyer not a seller and a bottom could be confirmed in the next week. There is converging support in the $159.50 area. I will be posting weekly charts of both the S&P 1500 Airlines and Railroads indices later on Twitter.
If you like this type of technical analysis you might consider my Viper ETF Report or the Viper Hot Stocks Report . Both include regular Trading Lessons and are each $34.95 per month.
The 184 mid-day drop in the Dow Industrials last Thursday caused a spike in the bearish sentiment as most attributed the decline to the lack of real information in the Trump press conference. It did not take long until the Wall Steet Journal headline “Dow 20000, Maybe Never” emerged.
Several of the traders in their regular mid-day appearance voiced concern over the outlook for the banks which were down sharply in the morning. It had only been a month since there were some who wanted to buy them at any cost.
In Wednesday’s technical review I reviewed the positive outlook from the advance/decline lines for both the PowerShares QQQ Trust (QQQ) and the Spyder Trust (SPY). The daily A/D lines do not show any signs yet of a imminent correction. It would take several down days that were much worse than last Thursday to signal that a correction was underway. To learn more about A/D line analysis read “One Indicator Stock Traders Must Follow”.
The daily chart of the PowerShares QQQ Trust (QQQ) shows the strong close Friday with the weekly starc+ band now at $126.44. The initial yearly pivot resistance at $128.73 is the next target I am watching for traders. The width of the trading range, lines a and b, was upside targets in the $125-$126 area.
The daily Nasdaq 100 A/D has turned sharply higher which is a very bullish development. The A/D line had surged to a new high in December as it overcame the resistance at line c. There were signs in December that the tech sector was going to start leading the market higher. For Viper ETF clients long positions in the QQQ and the Technology Sector (XLK) were recommended in December.
The ongoing media debate about the status of the Trump Bump or the post election stock market rally is becoming a prevailing media theme. It reminds me of the monthly debates over what the Fed will do at their next meeting which has been distracting investors for years. In the past uncertainty about whether the Fed will act or not I believe has kept many investors out of the markets.
The goal of my columns as well as my advisory services has always been to help investors gain a greater understanding of the markets. I firmly believe that those who are willing to do the work can become their own investment advisor. Successful investors learn not to get caught up in the prevailing themes that are often the focus of the financial media.
Over the years I have observed that many investors are often impacted by the media and do not act or worse have changed their strategy because of the headlines. This is what happened during the severe market corrections in 2010 and 2011 when many were warning of another recession.
The concern that the Trump rally will fail in my opinion is just a new addition to the wall of worry that has kept many investors out of the stock market. In February of 2016 there were even more reasons to stay out of stocks which I outlined in “Should Investors Ignore “The Wall of Worry”?. It is my view that the tremendous surge in optimism after the election will have a lasting impact in 2017 even though reality may not match the promises.
A Market Watch article Friday “Investors are bracing for a massive stock-market selloff” reported very large purchases of out of the money call options for the VIX. It would have to almost double just to get back to the most popular strike price. It is no secret that those who have bought protection or bet on the market’s downside in the past year have not done well. Just last week it was reported that George Soros lost $1 billion on the market rally.
A meaningful retracement in financial stocks that have led the Trump rally would likely trigger more fear amongst investors In the latter part of October I featured a bullish chart of the DJ US Financial Sector (DJUSFN). Of course the banks have been the strongest part of the financial sector but the DJ US Banks Index (DJUSBK) has been moving sideways since the middle of December after it had traded above its weekly starc+ band for five weeks in a row.
When a market is trading above its weekly starc+ band it will either correct sharply or trade sideways for several weeks until prices have moved further away from the starc+ band and it is therefore less overbought. This may be what is occurring with the bank index.
The starc+ band is now 7% above Friday’s close with the major quarterly pivot resistance at 476 which is over 17% higher. The weekly relative performance was clearly positive in October (line 1) as it was well above its WMA and had just broken out. It still looks strong as does the OBV which is now acting stronger than prices.
Big banks earnings on Friday mostly exceeded expectations and even the weak results from Wells Fargo (WFC) did not stop the stock from gaining 1.5% on Friday. JPMorgan Chase (JPM) made a new 52-week high last week as the major resistance at $66.60 (line a) was overcome in early October. The weekly RS and OBV both turned positive in September as they started leading prices higher. The quarterly pivot resistance is at $93.76 which is just above the weekly starc+ band at $91.94.
Behind the scenes the market leading iShares Dow Jones Transportation ETF (IYT) has had a very normal correction. At the recent low it had dropped 5.4% from the recent high. On Friday it triggered a weekly doji buy signal (see arrow). The RS and OBV are acting strong and do indicate the weekly uptrend has resumed. The buying levels for IYT from the Viper ETF Report were hit last Thursday.
The weekly and monthly technical outlook on the stock market is positive so now lets look at the economy.
The Economic Cycle Research Institute released its public analysis of the economic cycle or its ERCI Weekly Leading Index which is reflected in the chart above from dhsort.com. Their index has risen sharply since the last quarter of 2015. It has now moved well above both of the 2011 and 2013 highs.
In September 2016 they were looking for “Global industrial growth boosting commodity prices, affirming ECRI’s call for global industrial growth upturn.” Their view for 2017 includes “reflation calls for both the U.S. and global economy, a global industrial upturn call, and a U.S. growth rate cycle upturn call“.
Last Friday’s PPI came in as expected while Retail Sales were a bit lower at 0.6% as apparel sales were weak as was overall discretionary spending. The Consumer Sentiment held firm mid-month at 98.1 but did not climb higher from last month.
This week we have the Empire State Manufacturing Survey on Tuesday with the CPI, Industrial Production and the Housing Market Index on Wednesday. There is more data on manufacturing Thursday with the Philadelphia Fed Business Outlook Survey which has been in a powerful uptrend since last summer.
Interest Rates & Commodities
The yield on the 10 Year T-Note bounced on Friday but still closed the week lower at 2.380%. The yield had hit a high of 2.621% in the middle of December. There is much stronger support in the 2.210-2.250% area. There are signs that the correction in rates could end in the next few weeks.
Crude oil prices were lower last week and the daily indicators do allow for a further correction. However the monthly open interest and volume analysis are strong which suggest that a further correction will be will supported.
It was definitely a mixed close last week for the major averages as while the Dow Industrials and S&P 500 were slightly lower the small cap Russell 2000 firmed as it was up 0.35%. The Dow Transportation Average and the Nasdaq 100 were both up over 1% and more stocks advanced then declined.
The Spyder Trust (SPY) was slightly lower last week but did close near the highs. A strong close above $227.75 should signal a move to the $231-$233 area which corresponds to the weekly starc+ band and quarterly pivot resistance.
There is initial support now at $225-$226 and last Thursday’s low. The monthly pivot is at $223.67 with the more important quarterly pivot at $220.08. The weekly S&P 500 A/D line made a new high a week ago and it holding well above its strongly rising WMA. The daily A/D line has not yet moved above the December highs but is also holding above support.
The iShares Russell 2000 (IWM) firmed late in the week but is still in the five-week trading range. A close above $138 is needed for an upside breakout and a move to the $142-$144 area. There is initial support at $133.59 which was last Thursday’s low. There is major support in the $125-$126 area, line a.
The Russell 2000 A/D line made a new high in early December and is still holding well above its clearly rising WMA. There is long-term support for the A/D at line b. The daily A/D line dropped down to support from the November highs and is still in a trading range.
What to do? The decline on Thursday added to the skepticism about how long the Trump rally will last but the morning drop was well supported and those who sold the early decline were not happy by the close.
Another drop would help reduce the bullish sentiment but the daily A/D lines are still pointing higher not lower. It would take several consecutive down days with solidly negative A/D numbers to suggest a deeper correction. New buy signals dominate the weekly scan for the Viper Hot Stocks Report and I may add another transportation stocks as we are already long CSX.
I continue to favor buying on weakness and the odds of a deeper correction increase as we move into February but it could come from higher levels. I think 2017 will be a good trading year and also looks promising for investors as the surge in optimism should have an impact for a good part of the year.
To better avoid the market noise I would suggest you follow the quarterly pivots on stocks and ETFs as a way to determine not only good support but the prevailing trend. They do play a significant role in my advisory services
For those who are interested in becoming a better investor or trader you might consider my individual training sessions. If you would like more information you can email me at wentworthresearch@gmail.