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.