Last week started off under the influence of Janet Yellen's comments that rates were going to be raised this week. As bond yields surged stocks opened the week lower and stayed under pressure until they bounced in reaction to Friday's jobs report. The market decline has what many have been waiting for but so far no real serious bargain hunting has emerged but will it this week?
The analysis of the advance/declines last week (How To Keep Riding This Bull Market) argued how multiple time frame analysis of this key data has kept one on the right side of the stock market.
The plunge in crude oil may have dampened the enthusiasm for stocks last week. The open interest in crude oil expanded dramatically in early November as it broke above the highs since early 2016, line a. This chart from www.quandl.com shows that the non-commercial long positions also moved sharply higher.
Some attribute these outsized long positions to an inflation play but the failure of prices to move higher over the past three months started a trickle of long liquidation in early March. The heavy selling last week was accompanied by an increase in open interest as new short positions helped drive crude oil futures lower.
As crude oil dropped almost $5 per barrel this week I wanted to take a look at what this does to the monthly chart of crude oil prices even though the month is far from over. Crude is now trading below the 20 month EMA at $50.73 for the first time since October 2016. It is still above the monthly support at $45.70, line b.
The monthly OBV is still well above its WMA as it turned bullish in April 2016 by breaking its downtrend, line c. The strongly rising WMA is a positive from a long-term perspective. The Herrick Payoff Index (HPI) is a very valuable tool that is used by very few commodity traders. It was developed by the late John Herrick who I had the pleasure of meeting many years ago.
The HPI uses volume open interest and prices to gauge money flow in our out of a commodity. As I have taught individual traders in their one on one sessions the bullish or bearish divergences in my multi-year HPI analysis are quite important. The monthly HPI made its low in early 2015 and while prices were declining it formed higher lows and a positive divergence, line e.
This bullish divergence was confirmed one month after the low in March 2016 as it moved above its WMA and the prior high. The break in the longer-term downtrend, line d, was also a sign that money was flowing back into crude oil.
The weekly HPI dropped below its WMA in January and will drop below the zero line this week. This suggests that crude oil is likely to drop for a few more weeks before a bottom could be completed. On a short-term basis crude is quite oversold so a bounce is likely this week. The monthly HPI is still well in positive territory.
The % Change chart shows that the Energy Sector Select (XLE) had been leading crude oil prices since early 2016. It surged in late 2016 to overcome the $70 level but peaked before the end of the year. XLE has been in a gradual slide since its highs as crude oil prices held up much better until last week. I think this decline will eventually create a great buying opportunity in the energy ETFs but XLE could drop as low as the $63-$65 area.
The stock market correction from the March 1st high as retraced almost 2% in the E-Mini June S$P futures which is a market I follow closely and report on regularly to Viper clients. The futures will often hit support or resistance overnight when the cash markets are closed.
The futures moved above the starc+ band on March 1st which identified that the futures were in a high risk buy area. The monthly pivot resistance at 2398 was also exceeded. The futures tested the 20-day EMA last Thursday and then turned higher on Friday.
The daily OBV has moved back above its WMA as the volume was quite heavy late in the week as the futures turned higher. This suggests that the correction is likely over as only drop early in the week could mean a decline to the daily starc- band at 2337 is needed before the correction is completed. There is more in the Market Warp section on the two most likely market scenarios.
I often criticize CNBC for having the same guests over and over again who repeat their same bearish outlook year after year. Therefore I was pleased on Friday with their Matthew Gardner interview who is from the Institute On Taxation and Economic Policy. It is non-profit, non-partisan research organization that has been doing solid factual work for decades.
Since I deal with data every day I get very upset when a falsehood is repeated by our elected representatives over and over again. Anyone who closely reads the public corporate filing discovers that many corporations do not pay much if any taxes. In the ITEP report they note that 100 companies paid zero tax or less in taxes in at least one year since 2008.
Though Congress will tell you that the corporate tax rate of 35% is crippling US corporations ITEP found that
30 companies paid effective eight-year tax rates between zero and 10 percent. Their average effective tax rate was 6.9 percent.
Even worse is that 18 companies paid less than 0 percent over the eight-year period. Their effective tax rate averaged -4 percent.
The full report can be found on their site and you will find the real rate of many well-known companies is astounding and many actually pay a higher rate overseas. They are clearly paying less in taxes than their employees are. Therefore if your representative continues to mislead you on this then you might take a look at what other non-facts they are promoting.
Aside from Friday's job report there was not much of economic data last week. Factory Orders Monday were up 1.2% while Wednesday's Productivity and Costs report met estimates. There were also no surprises from Import and Export Prices.
This week we have the PPI on Tuesday with CPI Wednesday along with Retail Sales, the Empire State Manufacturing Survey, Business Inventories, the Housing Market Index along with all-important FOMC announcement.
On Thursday we get the Housing Starts and the Philadelphia Business Survey followed Friday by quadruple witching, Industrial Production, Consumer Sentiment and the Leading Indicators. These reports are likely to increase the market volatility but do not expect anything to derail the positive economic outlook.
Interest Rates & Commodities
The yield on the 10-Year T-Note rose again last week as the daily flag formation was completed on March 2nd. The 1.272% Fib target is at 2.672% and the measured target from the flag formation is in the 2.700% area.
The ProShares Ultrashort 20+ tear ETF (TBT) is up 7.4% in March though it did form a doji on Friday as it came close to the daily starc+ band. The completion of the flag formation, lines a and b, confirmed the buy recommendation for Viper ETF Investors. The upside targets are the 1.272% Fib target at $43.96 and the quarterly pivot resistance at $45.25.
The daily OBV has overcome resistance at line c, which supports the price action. On a short term basis we may see a pullback in reaction to this week's PPI and CPI data or the FOMC announcement. The rising 20-day EMA at $40.35 is now initial support with the monthly pivot at $39.40.
The April Comex gold futures lost $25 last week as the rally from the late 2016 lows had topped out just above the 50% retracement resistance at $1256.5. I had warned of this technical development a few weeks ago as I was not interested in buying gold or the miners. The OBV failed to make new highs on the rally and then dropped below the support at line a.
The daily money flow, based on the HPI turned negative on March 2nd as it dropped below support ( line c) and the zero line. The weekly HPI has turned down but is still positive. The Friday doji and the closeness to the daily starc+ band favors a bounce that is likely to fail in the $1225-1230 area
The stock market was lower last week as the S&P 500 closed the week down 0.4% which was the first weekly loss since the middle of January. The Dow Industrials had a similar loss while the Dow Transports and small cap Russell 2000 lost over 2%. The declining stocks led the advancing ones by over a 3 to 1 margin.
The sentiment picture is mixed as the latest AAI survey revealed that the bullish % of individual investors dropped 7.9% to just 30% while the bearish % jumped 10.9% to 46.5%. These numbers are more consistent with the end of a correction not a more important top. In contrast the % of bullish newsletter writers was recently 63.8%% which is the highest reading since January 1987. It should be noted that peaks in newsletter sentiment generally come before a market top.
The weekly chart of the Spyder Trust (SPY) shows the last week's lower close was above the week's lows. The former weekly resistance at line a, has been retested with March pivot support at $233.53. The more important rising 20-week EMA is at $230.36.
The weekly S&P 500 A/D line as well as the NYSE A/D line turned lower but both are still above their rising WMAs. Another week of negative A/D numbers could take these A/D lines back to or a bit below their WMAs. The daily S&P 500 A/D line (not shown) dropped below its WMA at the start of the week but turned back up on Friday. It has not yet moved back above its WMA.
The PowerShares QQQ Trust (QQQ) was up 0.2% for the week as Friday's close was above the highs of the prior five-days. The daily momentum did turn positive on Friday. The daily starc+ band is at $132.56 with monthly pivot resistance at $134.37. The rising 20-day EMA is at $129.55 with the monthly pivot at $128.53.
The Nasdaq 100 A/D line peaked on February 21st and dropped below its WMA Monday but moved back above it on Friday. This may mean that the correction is already over but the A/D needs to move to new highs to confirm. The daily OBV bounced from its WMA and closed at a new high which is a positive sign.
The Dow Industrials A/D line has also moved back above its WMA and DIA triggered a daily doji buy signal. The Russell 2000 A/D is by far the weakest as it dropped below the early December and February lows last week. It turned up Friday but is still well below its declining WMA.
What to do? In last week's column I suggested that the market surge may have exhausted the short-term buying pressure so a "correction of say 1-2%" was needed to digest the recent gains. The drop in the daily A/D lines below their WMAs did put the A/D lines into the corrective mode so what it the most likely scenario for stocks in the week ahead?
Only the Russell 2000 weekly A/D line has dropped below its WMA so the intermediate term trend is still clearly positive. This combined with the positive action in the Nasdaq 100 and Dow Industrials A/D line favors another push to the upside for the stock market this week. Convincing new highs could force some new buyers into chasing the market and a higher weekly close will support this view.
The less likely scenario in my opinion is that the market will consolidate and correct for another week or two. This could take the stronger weekly A/D lines back to their rising WMAs. A longer period of corrective activity would help to further dampen the bullishness and may convince those on the sidelines not to buy the dip.
A further correction could take the S&P 500 down to the 2325-2335 area but there are no signs of an intermediate term top which would take longer to develop. The daily correction was an opportunity for those who were not invested to do some light buying in a low cost broadly diversified ETF. Additional buying could be done it there is a further correction.
Viper ETF traders are now using tighter stops and will look to take more profits if my upside targets are reached. I will continue to use wider stops for investors until there are more serious warning signs.
In my weekly scan there were a few more stocks that gave new sell signals but traders following the Viper Hot Stocks Report are mostly long.
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