The further turmoil in the Trump administration and growing controversy in Washington did not stop the stock market from moving even higher last week. The surge in stock prices over the past two weeks surprisingly has not been accompanied by an increase in the bullishness of the individual investor.
According to AAII the bullish % dropped 2.7% to 33.1% while the bearish % rose 4.7% to 32.4%. if the bearish % rises again this week it would be even more surprising. It seems like the horde of bearish analysts that were bombarding my inbox in January have moved to the sidelines.
The stock market strength is causing some pain as the Catalyst Hedged Futures Strategy Fund lost $600 million or 15% in just five days as reported by the Wall Street Journal. The loss was tied to an option strategy that benefits from a stable market. The bearish part of this strategy moved further under water as the market again pushed to the upside and the decision was made to limit the losses. According to Morningstar the fund has done 2% better per year than the S&P over the past nine years.
After closing at a new record for six days in a row the Dow Industrials sagged early Friday but rallied late to again close higher. The rally over the past week was confirmed by the technical studies as discussed in the Market Warp section but though the market internals were positive they were not that impressive.
What was impressive was the economic data as it indicates that the economy continues to improve. One portfolio manager on the credit side commented that “the real risk… is that the economy runs too hot.” Those who have been pessimistic on the economy for the past few years must be shaking their heads in disbelief.
Typically January is not one of the best months as since 1950 the S&P 500 has averaged a gain of 0.79% so last month’s 1.79% gain was the best since the 5% gain in 2013. Of course 2013 was the best year of the bull market as the Spyder Trust (SPY) gained 32.3%.
This banner year was preceded by a strong move in the NYSE A/D line in December 2012 as it moved to a new all time high on December 12th (point 1) though the NYSE Composite was still 1.5% below its high. The A/D line made another new high before stocks plunged into yearend over fears of the impasse over the “fiscal cliff”. The analysis of the A/D had me recommending before the drop that investors “Stuff Those Stockings with Stocks”.
The long-term performance of the S&P 500 in February shows a loss of 0.05% with the S&P up 38 years and down 29 years. In 2013 the S&P 500 was up 1.1% and is currently up 2.9% but of course the month is not over.
When it comes to the Spyder Sector ETFs two of the best months are March and April as this chart from CXO Advisory indicates. Their analysis reveals that the energy (XLE) , financial (XLF), materials (XLB) and consumer discretionary (XLY) have gained between 5-6% in March and April. Let’s look at each of these sectors and their related markets.
Crude oil, using data going back to the early 1980’s has a seasonal tendency to form a double bottom in early February, line 1, and then stay strong until July (line 2). Crude oil has traded in a range lately after overcoming important resistance, line b, in December. The breakout has next upside targets in the $60-$62 area.
Since peaking in December the Energy Sector Select (XLE) it has declined for the nine weeks in a row as it has lost almost 8%. In contrast crude oil is pretty much unchanged so far in 2017. XLE typically bottoms on January 22nd, line 1 and then forms an initial top in late April, line 2. A secondary high or double top is then formed in early June. The weekly relative performance and OBV for XLE needs a strong close in the next few weeks to move back into positive territory.
For the financial sector I prefer the Vanguard Financial ETF (VFH) which as 400 holdings as compared to 63 in XLF. On the chart I have included the recent buy and sells for investors from the Viper ETF Report. as longs were recommended in late October. A 16% profit was taken in early December and new longs were recommended in the latter part of January.
The seasonal tendency is for an initial bottom in the middle of November (line 1) and then a secondary bottom at the start of March, line 2. It typically peaks at the end of April. The comments on rates from Fed Chair Janet Yellen last week have pushed VFH sharply higher. The weekly technical readings for VFH look strong.
The Materials Sector Select (XLB) made its recent low on October 14th which was right on target with the seasonal pattern. After an interim peak in early January XLB again moves higher and typically tops in early May. It has not made new highs recently but still is in a positive intermediate term trend.
The Consumer Discretionary Sector (XLY) broke out above the 2015-2016 highs, line a, in early December which had initial upside targets in the $90 area. The seasonal tendency is for XLY to bottom in the middle of October (line 1) and then tops at the end of April, line 2. The 20-week EMA was tested after the breakout and has turned up more sharply. Viper ETF clients are also long XLY, as they are XLB and XLE.
The Consumer Price Index came in at 0.6% double the consensus estimate as it has broken out of a three-year range. The Retail Sales were also strong as they came in at 0.4% while the economists were expecting just 0.1%.
The Empire State Manufacturing Survey came in at a strong 18.7 well above the consensus of 7.5. Then on Thursday the Philadelphia Fed Survey surged to 43.3 almost double last month’s reading of 23.6. I have been discussing the improvement in this survey since it broke the downtrend last fall and it continues to look very strong. This bodes well for the months ahead.
On Tuesday we have the PMI Manufacturing Index followed on Wednesday by the Existing Home Sales and FOMC minutes. There is more on manufacturing Thursday with the Chicago Fed National Activity Index and then the PMI Services Index. To end the week we have New Home Sales and Consumer Sentiment on Friday.
On Saturday morning I will be writing the Market Warp section of the Week Ahead and I will be updating the analysis of the weekly/daily A/D lines on the Spyder Trust (SPY), PowerShares QQQ Trust (QQQ) and iShares Russell 2000 (IWM as well as the financial ETFs.
The Market Wrap section will be released by 2PM NY Time on Saturday. Check here on Forbes to get my full analysis and I will tell you what markets to watch in the week ahead.
Last week’s strong stock performance and bullish market internals were consistent with the resumption of the post-election rally. The stock market’s narrow range and the failure to exceed the January highs had put many investors as well as traders on the sidelines.
In fact bulls have been hard to find as even the new Dow high at the end of January was not enough to turn many bullish. This decline in the bullishness was evident from the AAI survey as the bullish % dropped from 46.2% on January 5th to 31.6% on January 26th.
In last week’s “Is Bullish Sentiment Now Low Enough?” the focus was on how the advance/decline lines overall were giving a much more bullish outlook for the markets. The NYSE, S&P 500 and Nasdaq 100 A/D lines all made new highs on Thursday which confirmed the price action.
Despite the new highs the focus of many is on why the market cannot possible go much higher. Articles frequently focus on how high the P/E ratios are from a historic standpoint which is used to argue that stocks are not cheap and that investors should not buy.
In January’s article “Wait For Signs Of A Trump Bear Market” I urged investors to wait for signs of a Trump bear market before paying too much attention to any fundamental argument as to why stocks were topping out. A correction of 5-10% is always possible but over the past thirty years the majority have been signaled in advance by advance warnings from the A/D lines. There are no such warnings at this time.
So what is an investor to buy so that the risk is manageable?
In November I pointed out that the monthly chart of the small cap iShares Russell 2000 (IWM) had completed a trading range, lines a and b, that went back to 2013. At the time many were also complaining about too high P/E ratios. Using the width of the formation the upside targets are in the $148-$150 area. The Russell 2000 A/D line had completed its trading range (lines c and d) in July as it was leading prices higher.
The initial yearly pivot resistance for the IWM is at $151. Based on the January close a rally to $150 would be a gain of 11%. The underlying Russell 2000 has not made a new high yet but based on last week’s action it could this week.
The Spyder Trust (SPY) has initial yearly pivot resistance at $241.28 while PowerShares QQQ Trust (QQQ) has next yearly resistance at $128.73. Viper ETF investors and traders are long IWM, SPY and QQQ as well as the Vanguard Small Cap Growth ETF (VBK).
How about individual stocks?
The decline in bullish sentiment was accompanied by a decline in the % of S&P 500 stocks above their 50 day MA. In early January the 5-day MA of this % peaked above 74% but has since declined almost to the mean at 55.2%. It is well below extreme levels in the 80-90% area. The downtrend in the 5-day MA, line a, was broken in November which was a positive sign.
In recommending stocks for the Viper Hot Stocks report I do a weekly and monthly scan of over 150 stocks. As part of the selection process I carefully examine the long term charts of the stocks that turn up in my scans. One such stocks in Mylan Inc. (MYL) which has been suffering from the negative press because of their sharp increase in EpiPen prices.
The monthly chart shows that MYL came close in both November and December to the 61.8% Fibonacci support at $32.76 that was calculated from the 2008 low of $5.75. The high in 2015 was $76.68 as it reached the monthly starc+ band. The stock is now about 50% below its 2015 high.
A monthly doji was formed in November so a February close above $40.50 will trigger a doji buy signal. The declining 20-month EMA is at $43.92. The monthly relative performance (RS) is still in a clear downtrend and is well below its WMA. The OBV is stronger as it has bounced from major support at line b. It could move back above its WMA in the next month or two.
Of course just because a stock has been weak for the past year or more is not a reason to buy. A look at the weekly RS shows that it could move above its WMA this week and the OBV is already positive. Though Viper Hot Stock traders are not currently in MYL they are long Vantiv (VNTV). Positive relative performance and volume are consistent with a bottom formation.
When a stock breaks out of a thirty week flag formation, lines a and b, as was the case for VNTV in early January it can create a good risk/reward opportunity. The formation has upside targets in the $66 area and on the breakout initial stops could be placed under the late December low of $58.90 (see arrow). The breakout level was tested last week but VNTV then closed strong. The weekly RS and OBV analysis have been positive since late last year.
One of the best sites (Four Go-To Investment Research Sites) that I have found for looking at a large number of charts is Finviz.com. It gives you the capability to look at all stocks in a industry group and then switch from daily, to weekly or monthly on an individual stock. On their free site you can also scan for chart formations, unusual volume as well as a host of fundamental criteria.
Whether you are planning to buy a stock or ETF I always encourage all to do their own research and to concentrate on the risk not the potential reward. If you do this and use the starc bands it will help keep you from buying too high.
Friday’s mid-month Consumer Sentiment survey came in at 95.7 which is down a bit from last month’s reading at 98.5. Still it is a strong number which is a plus for 2017.
This week the calendar is much more crowded as Wednesday we have the Consumer Price Index, Retail Sales, Empire State Manufacturing Survey, Industrial Production, Business Inventories and the Housing Market Index.
On Thursday we have Jobless Claims, Housing Starts, the Philadelphia Fed Business Outlook Survey and then Leading Indicators on Friday.
Interest Rates & Commodities
The yield on the 10 Year T-Note traded in a wide range last week as after closing the prior week at 2.491% they dropped to a low of 2.325% on Wednesday. The yields rose the last two days of the week to close at 2.409%.
The daily yield chart still shows a flag formation but a move above 2.555% is needed for an upside breakout. A daily close below the 2.30% level would violate support going back to November and would suggest a drop towards the yearly pivot support at 2.220%.
The April crude oil contract rallied sharply from Wednesday’s low at $51.86 on news that the OPEC measures to reduce production are actually working. Crude sill closed the week a bit lower so this week’s close will be important.
The Comex gold futures have rallied $100 from the mid December lows and have retraced 50% of the decline from the July highs. The former support, line a, is now important resistance. It is in the 1284 area along with the weekly starc+ band and the 61.8% resistance level.
The weekly OBV is above its WMA but still below the downtrend, line b. The HPI is back above the zero line and its WMA. The daily indicators are not impressive and they do suggest a failing rally.
It was a bullish week for stocks after a lackluster start as they accelerated to the upside on the last two days of the week. The Dow Industrials were up 1% while the Transports gained 1.6% for the week. The S&P 500 was up 0.80% as was the Russell 2000 but the Nasdaq 100 gained over 1.3%.
Though there have been some downside surprises in earnings it has been the good quarter as I was expecting late last year. According to Thomson Reuters quarterly earnings may grow by 8.4% in the 4th quarter which validates the higher stock prices.
Consumer Goods were up 1.5% with consumer services gaining 1.4% while technology and industrials sectors were both up over 1%. Even though banks stocks rallied late in the week the financial stocks were up just 0.44%.
The Spyder Trust (SPY) closed above the upper boundary (line a) of the rising wedge formation which is a bullish sign. There is monthly pivot resistance at $232.87 with the weekly starc+ band at $236.30. The 20-day EMA at $228.82 was tested Wednesday before prices turned sharply higher.
The S&P 500 advance/decline line also broke through its resistance, line c and confirmed the price action. The weekly A/D line (not shown) also made new all time highs last week. The daily OBV has also risen sharply and is clearly positive as is the weekly OBV.
The close last week in the PowerShares QQQ Trust (QQQ) was impressive. The daily starc+ band is now at $128.13. The trend line resistance, line a, along with the weekly starc+ band and monthly pivot resistance are in the $130-$131 area.
The weekly Nasdaq 100 A/D line broke out to the upside in early January (see arrow) and has since accelerated to the upside in impressive fashion. The A/D line is well above its rising WMA as is the daily A/D line which has also made new highs.
The iShares Russell 2000 (IWM) closed above its downtrend, line a, on Friday. Though it is still below the December high at $138.25 it should complete the continuation pattern that we have been watching for the past month. This supports my view that it was a continuation pattern not a top that was forming.
The Russell 2000 A/D line closed the week back above its WMA but is still slightly below the downtrend, line c. The weekly A/D line is positive and is holding well above its WMA. The next upside targets are in the $143-$144 area but once the small caps start moving they could go even higher.
What to do? The strong close last week favors more gains this month. The completion of the daily flag formation in the S&P futures has upside targets at 2330 and then 2340. The recent buying in the small cap stocks indicates that they could start leading on the upside.
Many fundamental analysts and media traders have been cautious on the market since the start of the year while my A/D line analysis has kept me bullish. The basis of this analysis was reviewed again last week.
Back in April I suggested that “those who were not invested should consider a dollar cost averaging program where six equal investments were made over a period of time. Those non-active investors should consider a broadly diversified ETF like the Vanguard Total Stock Market ETF (VIT) or the Vanguard MSCI Europe (VGK).”
I would not be chasing the technology stocks at this time as Viper ETF investors and traders are long QQQ and XLK from much lower levels. For new longs the small cap stocks look the best though longs in both IWM and the Vanguard Small Growth (VBK) were previously recommended. It will take several more days of strong market internals before the Russell 2000 A/D line starts to trend higher and confirms much higher prices.
I do expect to see a 5% or more correction sometime this spring but is may have to wait until April as some investors try to get a jump on the sell in May phenomenon. There should be plenty of warning before such a correction. There are still some sector ETFs that look attractive for new buying.
As I noted previously there are a number of stocks that are just starting to outperform the S&P 500 and our Viper Hot Stock long positions like PCAR , TSO and EA performed well last week. Electronic Arts (EA) was up 3.5% on Friday.
If you would like specific buy and sell advice you might consider my Viper ETF Report or the Viper Hot Stocks Report . New subscribers receive five recent Trading Lessons can help you become better investors and traders. The 4-5 page ETF and Stock reports are sent out twice a week and each report is only $34.95 each per month. Subscriptions can be cancelled on line at any time.
The inability of the S&P 500 to surpass the late January highs and the tight trading ranges has caused an increase in bearishness among investors and traders. The White House induced volatility has also not helped.
The change in outlook has been confirmed by the sentiment data from the American Association of Individual Investors as 46.2% were bullish the week of January 5th. Three weeks later on January 26th the bullish % had fallen to 31.6% and it was at 32.8% last week. This is a decline of 29% in the bullish % from the Trump rally highs.
The increased skepticism is also reflected by the increase in bearish commentary in the financial blogs and on the TV financial stations. The fundamentalist analyst has any number of measures to use that convinces them that stocks are too expensive. A little research however will reveal that many of these analysts have been saying the same thing for many years. They will eventually be right.
Some are warning that the market is looking as vulnerable now as it did during the summer of 2015 and in early 2106. The analysis of the number of stocks advancing versus those that are declining tells a different story. In a strong market more stocks are advancing then declining so the cumulative advance/decline line is rising.
As a market is topping, as it was in the summer of 2015, the advance/decline line will be making lower highs even though prices are still making higher highs. In early July of 2015 the divergence was becoming more pronounced but stocks did not start to plunge until August.
The weekly chart of the Spyder Trust (SPY) shows that as it was making a new high the week of July 24, 2015 the S&P 500 A/D line was much lower (line 1). It was also below its declining WMA and five weeks later the stocks plunge culminated on August 24th.
The daily A/D lines turn positive or negative ahead of the weekly analysis and in December the Nasdaq 100 A/D line broke its downtrend, line b.
Summary: The Spyder Trust (SPY) completed its flag formation on January 25th which was supported by a new high in the S&P 500 A/D line. The small cap Russell (IWM) is still in its trading range and it needs a close above $138.25 to signal that its uptrend has resumed.
This A/D line analysis is typical of the content of the trading lessons that are sent out to subscribers of the Viper ETF Report and the Viper Hot Stocks Report. Each service is just $34.95 per month and new subscribers get the five most recent trading lessons.
Interest Rates & Commodities
The yield on the 10 Year T-Note rose slightly last week and the lower wage growth in Friday’s job report has more now looking for a rate hike in May. The weekly chart of the inverse iShares Proshares 20+ year Bond (TBT) appears to have completed its correction 4 weeks ago as it dropped down to good support at line b.
On a move above the late 2016 high of $42.72 the quarterly pivot resistance (QR) is at $45.25. The weekly OBV bottomed in early November before the election and just pulled back to its rising WMA on the correction. It is acting stronger than prices.
The April Crude oil contract was higher last week and the daily indicators are now positive. Still a move above $57 is needed to signal upward acceleration. There is initial weekly support now at $52.40.
The gold and gold mining stocks closed the week higher and the weekly studies do suggest that a bottom is in place. However they are extended so a pullback should be a good buying opportunity.
Even though stocks rebounded sharply Friday with the Dow Industrials recording the best day in two months but it still closed the week slightly lower. The Dow Transports were the weakest down 2.1% while the Russell 2000 gained 0.52%. The slightly higher close in the broadly based S&P was a plus as was the 1914 to 1184 positive margin in advancing over declining stocks.
According to AAII the bullish % of individual investors rose 1.2% last week to 32.8% and the bearish % was up a bit at 34.2%. It has been above 30% for three weeks in a row. This is what one would expect during a correction. The CNN Fear & Greed bounced to 60 on Friday up from 51 and is in greed territory. It was 70 a month ago.
The Sypder Trust (SPY) spent most of the week trading above and below the 20 day EMA which is now at $227.76. The close was back above the breakout level, line a. The flag formation has upside targets in the $232-$234 area with the weekly starc+ band at $234.99. There is quarterly pivot resistance at $240 and the yearly projected resistance from a recent Viper Trading Lesson is at $241.26.
The S&P 500 A/D line turned up from support at line c (see arrow) and closed well above its WMA. This reinforced the uptrend and the weekly A/D line closed at another new high. There is first chart support at $226.41 which was the week’s low with further at $225.
The broad trading range in the iShares Russell 2000 (IWM) has been in effect since the December 9th high at $138.25. For the past month I have been pointing out that this is likely a continuation pattern or a pause in the uptrend. It has lasted long enough to turn many negative on the small cap stocks which is quite normal.
On the upward completion of the trading range the initial targets are in the $144 area (see arrow) which also corresponds to the quarterly pivot resistance. There is good support in the $133-$133.50 area and the late November highs. The daily Russell A/D line has moved back above its WMA and needs to overcome the resistance at line c, to signal that the correction is over.
Viper traders and investors are still long the PowerShares QQQ Trust (QQQ) from December. It closed a bit lower last week but the weekly and daily A/D lines made further new highs. The QQQ and XLK shows no signs yet of a top.
What to do? I last looking for a higher weekly close last week to confirm that the correction was over but I had to wait until Friday. I have been favoring the SPDR S&P Regional Banking ETF (KRE) and the Vanguard Financial (VFH) which have become out of favor on Wall Street. Both closed up 2% on Friday and a move to new highs this week will be bullish for the overall market.
It will take several more days of strong market internals to start the A/D lines trending higher. this would increase the odds of another 4-6% on the upside. Even on the down days last week the A/D numbers were not too bad and it would take a few days of 3 or 4 to 1 or worse negative A/D numbers to turn the daily A/D lines back into the corrective mode.
New negative intermediate term signals from the A/D lines would take many weeks or several months to develop. This indicates the market can move higher at least until the spring.
If you would like specific buy and sell advice you might consider my Viper ETF Report or the Viper Hot Stocks Report . New subscribers receive five past Trading Lessons which are in-depth lessons on using pivots, stops, candle formations as well as determining both entry and exit levels. The ETF and Stock reports are sent out twice a week and each report is only $34.95 each per month.
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.
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.
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.
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 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.
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.
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.