It has just been a week since the panic selloff in the tech sector began on June 9th. The initial catalyst of the selling was tied to a research note from Goldman Sachs analyst Robert Boroujerdi that focused on “FAAMG — Facebook, Amazon, Apple, Microsoft and Alphabet — a group of five stocks which have been the key drivers of both the SPX & NDX returns year-to date.”
According the Factset these five stocks “lost more than $97.5 billion in market value” and the volume was heavy. I was not surprised that the selling has continued over the past week but so far Monday’s lows are holding.
Throughout this bull market there have been a number of such sharp market declines where the selling reaches a feverish pace but each of these has been followed by further new highs. Many investors who have sold in the moment and likely altered their long term plan did not get back into the market until stocks were much higher.
Not only is this detrimental to the long term portfolio performance it has also likely damaged the psychology of many investors who have later regretted their emotional reaction. So what can an investor do to avoid selling on a panic decline?
There are several methods that I use to identify panic declines but the most important are the advance/decline lines, starc- bands and the ARMS Index.
On May 17th and 18th there was another sharp decline (point 1) based on new revelations about the Trump administration. From the close on the 16th to the low on the 18th the PowerShares QQQ Trust (QQQ) lost 2.7% as QQQ traded below the starc- bands for two days.
Prior to the decline I commented In “Charts Point To A Good Month For Stocks” “ that the sharp rally in the Nasdaq 100 A/D line over the past three weeks is bullish and it is currently acting much stronger than it was in 2014 or 2016 (https://blogs-images.forbes.com/tomaspray/files/2017/05/WA5-5h.jpg?width=960)”. This made me confident that any correction would be a buying opportunity.
The QQQ gapped higher on May 19th and the following day it has surpassed the high from May 16th as the Nasdaq 100 A/D line made a new high. In early June (point 2) there was a daily doji sell signal and the Nasdaq 100 A/D line started to diverge from prices, line d. The A/D line is now slightly below its flattening WMA so the strength of the next rally will be important.
Another indicator that I watch for signs of a panic selloff is the ARMS Index developed in 1967 by Richard Arms. It is now known by some as the TRIN. In the early days of financial TV I tried to argue that they should refer to this indicator as the ARMS Index out of respect to Dick. Unfortunately I was unsuccessful but several years later had the pleasure of traveling throughout Asia with Dick and his lovely wife June. He has written a number of books on technical analysis.
The formula is pretty straight forward and while I have not been able to effectively use it to determine overbought conditions in it is often a very good indicator of a selling complex. Let’s look at a few examples.
From the December 2013 lows the NYSE had a dramatic rally through the end of the year. The stock market was able to hold its gains until January 13th, point 1, when it dropped over 1%. More importantly the ARMS Index closed at 2.05 which indicated increased selling pressure. The 2.00 level has always been a level that suggests to me that the sellers could be taking over. When the readings of the ARMS Index get to 3 or much higher it starts to suggest that you are near a selling climax.
On the January 24th 2014 drop (point 2) the ARMs Index closed at 1.39 as the NYSE Composite closed well below the starc- band. A decline in the emerging markets currencies triggered an initial wave of selling. After the NYSE after dropped below the starc- band for two days it moved sideways for three days before the selling resumed was even heavier
The selling on Monday February 3rd 2014 started overseas as the Spyder Trust ( SPY) opened lower and continued to drop throughout the day settling at $174.17 which was 2.2% below the prior Friday’s close. The range in the futures reflected even more violent selling as they opened Sunday night at 1777.50 and hit a low of 1732.25. The intra-day range was a whopping 51.5 points as the liquidation was relentless.
The ARMs Index closed at 3.42 on February 3rd (point 3) and was even higher during the day. This was a clear sign that the volume of selling was extreme and could have warned those on the short side not to be greedy and instead to take some profits. How many on the short side took profits that day or were there more that sold their long positions in a panic?
I am sure some did cover their short positions but many instead were expecting stocks to plunge further throughout the week possibly adding to their already sizable profits. They were likely dismayed when the NYSE Composite actually closed the week higher, point 4. Those who were still holding short positions likely had a sick feeling in the pit of their stomach.
The ARMS Index readings must be viewed in the context of the advance/decline line analysis. The NYSE A/D line made a new high in October 2013 (point 1) and on the early December decline it dropped below its WMA but held the support at line a.
The A/D line made a new high on January 22nd confirming that the positive trend was intact. This was a sign that a market decline should be just a pullback in the uptrend. It then turned lower and two days later dropped below its WMA. It moved back above its WMA on February 7th which was four days after the low. Two days later it made a new high at point 2.
This second chart of early 2013 shows the powerful rally that began on the last day of 2012 and carried over until the latter part of February. After the higher close on February 19th (point 1) stocks got hammered the next day in reaction to disappointing economic data and concerns over the Euro zone. The high flying stocks were hit hard with Tesla losing 9%.
On February 20th the Index closed at 2.99. Three days later as stocks dropped even further (point 2) the ARMS index closed at 2.87. This divergence indicated that the selling pressure was not as high even though prices were lower.
The A/D line held up well even though prices were lower (see shaded section). This was a sign that the price drop was caused by a few number of weak stocks. Two days after the lows the A/D line moved back above its WMA signaling that the decline might be over. This was consistent with the fact that the NYSE Composite low on February 26th at 8700.73 was just below the 38.2% Fibonacci support from the late December low.
Often times you will have a warning of a panic selloff as the S&P futures are down 20-30 points a few hours before the open. If the broadest NYSE weekly A/D line has formed a series of higher highs and is above its WMA then a drop should be just a pause in the major trend.
Then focus is then on the daily A/D lines to see if they recently made new highs or whether they are in the corrective mode. As part of both my Viper ETF Report and Viper Hot Stock Reports I update the levels on the starc bands so subscribers are aware of the potential price extremes. The starc bands as well as the ARMs bands are available on several free platforms.
Since the recent decline was concentrated in the technology sector there were no high readings in the ARMS Index. The NYSE A/D, S&P 500 A/D and Dow Industrial A/D lines all are above support and their WMAs so there are no warnings of a broad based decline. There are more details in the Market Wrap section.
I continue to think that the current decline is going to be a good buying opportunity. Viper ETF Traders sold longs in the Technology Sector Select (XLK) and the First Trust Dow Jones Internet (FDN) in mid-May just before the tech sector corrected.
The long positions in XLK that were established in early December were sold at $55.44 for a 19.6% profit. The high a week ago before the correction was $57.41 so we left some profits on the table though XLK is now back to our exit level.
Some subscribers wondered about my exit advice but it was part of my plan as major targets had been reached and XLK was near the weekly starc- band. It is always much easier to sell on strength then on weakness and I try to avoid chasing any market. That is why I provide very specific buy levels.
The long positions were established based on the positive daily relative performance analysis that was confirmed by a weekly RS in early January as investors were already long the PowerShares QQQ Trust (QQQ). The weekly RS did confirm the recent highs as it has now pulled back to its WMA. Last week XLK did form a doji so buy signal is possible in the next few weeks.
Since the early part of June I have been looking for some sector rotation which is now occurring and this is likely to be more pronounced in the weeks ahead. This will create some new buying opportunities.
The Economy
The data from the Empire State Manufacturing Survey came in at 19.8 as it was well above the consensus estimate of 5. This was the strongest since 2014. The Philadelphia Fed Survey also beat expectations as both continue to indicate a positive trend for manufacturing.
Industrial production was a bit lower as was the Housing Market Index though builder optimism is still in a positive trend. Housing Starts on Friday were disappointing as they dropped 5.5%. The mid-month reading on Consumer Sentiment came in at 94.5 which is the lowest reading since the election.
This week we have Existing Home Sales Wednesday followed Thursday by the Leading Indicators and the Kansas City Manufacturing Index. The week ends with the PMI Composite Index and New Home Sales.
Interest Rates & Commodities
The yield on the 10 Year T-Note declined last week as at 2.157% it was the lowest close since the week of November 18th. The weekly momentum still points lower despite the Fed’s rate hike. The daily MACD is negative but does not show any increase in downside momentum.
It was another rough week for crude oil as prices have fallen more than 11% over the past four weeks. There is quarterly pivot support now at $42.63. The weekly studies are still negative but the daily indicators do show some signs of bottoming.
There have been a number of traders that have been punished trying to pick a bottom in the energy ETFS. For example, the SPDR Oil & Gas Exploration (XOP)dropped 5.7% from Tuesday’s strong close but I think it still may be one of the summer surprises.
Market Wrap
The further split market action was expected in last week’s column “The Week Ahead: Market Analysts Worry About June”. The Dow Industrials managed a new high, closing up 0.53% while the Dow Utilities were up 1.75%. The S&P 500 was up slightly while the tech heavy Nasdaq 100 lost another 1.05% as did the Russell 2000. The weekly NYSE advance/decline numbers were slightly positive.
As I mentioned in Friday’s free Viper Report email (sign up here) “there was no serious technical damage on the tech stock decline”. Individual investors are still not very bullish as according to AAII the bullish % dropped 3.2% to 32.3% with the bearish % unchanged at 29.5%. The CNN Fear & Greed Index is neutral at 50 which is where it was a week and a month ago.
The industrials were the next best sector after the utilities gaining 1.24% with health care up 0.52%. Consumer goods and financials also showed solid gains while basic materials were down 1.46%.
The weekly chart of the Spyder Trust (SPY) shows that it has just pulled back to the breakout level, line a. The flag formation has upside targets in the $248-$250 area and one wonders what a close in the S&P 500 above 2500 would due to the sentiment.
The weekly S&P 500 A/D line made another new high last week and is well above its solidly rising WMA. The daily A/D line (not shown) also made a new high on Friday and is still in a solid uptrend.
The PowerShares QQQ Trust (QQQ) tested the weekly starc- band three weeks ago prior to the recent two week decline. The weekly starc- band and 20 week EMA are in the $133.50-$134 area with strong weekly chart support at $132, line a.
The weekly Nasdaq 100 A/D line made a new high three weeks ago before turning lower. It is well above its rising WMA and the support at line b. The daily chart featured earlier shows just a normal correction in prices and in the A/D line.
The weekly Dow Industrials A/D line made another new high last week along with the average. The daily Dow A/D line is also strong and made new highs on Friday. The iShares Russell 2000 (IWM) is still locked in the middle of its trading range. The weekly Russell 2000 A/D line is still above its WMA while the daily A/D line has pulled back to support. I will be watching it closely this week.
What to do? Even though there was some additional selling last week in the technology sector there are still no signs that a significant top is in place. In fact there could be new buy signs for the sector in the next week or two. If instead the QQQ has a failing rally back towards the recent highs then the period of consolidation will last longer.
The action in the health care and industrial sector has kept them market leaders as both continue to make new highs. The financial stocks need to move even higher for the weekly analysis to signal that they are new market leaders. The small cap stocks are still the wild card as a sharply higher close this week would be a positive for the overall market.
There were new weekly sell signals in the precious metal and mining ETFS where I have been on the sidelines
Still no signs of an intermediate top and certainly no recessionary warnings on the horizon so the long side of the stock market is still clearly favored.
The Viper Hot Stock scan reveals that there were a majority of new sell signals last week. These will be examined closely because even though the momentum may have turned negative one wants to avoid selling if they are near the weekly starc- bands.
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