Forbes.com 11/17/24: The whipsaw action in the stock market over the past two weeks likely has some investors looking for a personal injury attorney. The strong buying after the election results confirmed the bullish intermediate trend for stock prices as the fear of missing out (FOMO) seemed to be the dominant sentiment.
According to last week’s survey from the American Association of Individual Investors (AAII), the bullish % rose to 49.8% from 41.5% the prior month as the neutral camp dropped from 30.9% to 21.8%. It was interesting that the bearish % rose slightly to 28.3% from the prior reading of 27.6%. This week’s numbers will be interesting.
As last week progressed and proposed cabinet members were announced the sentiment seemed to shift to one of fear as nervous investors or traders tried to hypothesize what could happen to various stocks, sectors or the economy in 2025 if the promised plans were actually implemented.
The selling on Friday was led by tech shares as the six widely followed most valuable tech shares including Apple, Meta, Amazon, Nvidia, Alphabet and Microsoft lost $458 billion. Nvidia reports earnings on Wednesday.
For the week the SPDR Gold Shares (GLD) were the weakest down 4.6% despite the inflationary fears of some economists. The small-cap iShares Russell 2000 (IWM) lost 4.1%. The Nadaq 100 Index dropped 3.4% which was 1.3% more than the S&P 500’s loss of 2.1%. The Dow Jones Utility Average was able to gain 0.2%.
Even as the week started the high-margin debt, price-to-sales ratio and Bloomberg Intelligence noted that apparently, analysts are scaling back their forecasts for “earning growth over the next year.”
Something they call earning-revision-momentum “has slumped to negative territory.” This is apparently based on analysts' expectations for future earnings from the company report or their commentary. This in my view is very soft data. The negative earnings forecasts in both 2023 and 2024 kept many out of the stock market. In the current quarter, S&P 500 profits are expected to be 8.5% higher, double the estimate at the start of the earnings season.
The hard data numbers from last week’s trading were not as negative as some of the price action since on the NYSE there were 803 advancing issues and 2066 declining. But on Friday’s plunge, only 27% of the S&P 500 stocks closed lower while 78% were higher on November 5th. The NDX 100 numbers were more negative as 80% were down Friday with 70% higher on the 5th.
There has been some weakening in both the weekly and daily advance/decline lines. However, at this point is not a sign that the bull market is ending or that a bear market is imminent. Over the next few weeks, it may have more implications for traders than investors.
The weekly SPY decline did overlap about 50% of the prior week’s range but that does not complete a classic top formation. The 20-week EMA is rising strongly at $552.33 and it would be expected to be flattening or declining if a significant top was being formed. The QPivot is at $552.91 and a weekly close below this level would be more negative. The September lows are in the $540 area.
The S&P 500 Advance/Decline made a new high the week of October 18th and did not make a new high the week of the election. Therefore a bearish divergence has been formed but a drop below the prior low is needed to confirm the divergence. A close below its WMA will indicate that the S&P 500 is ready to move sideways to lower as we head into the end of the year. If the selling does not increase this week then the market is likely to hold the pre-election lows before turning higher.
In my experience, the major trend of the stock market is like a supertanker as it takes time to change direction. Bouts of heavy selling on future expectations or concerns in a bull market are frequently later acknowledged as just corrections in the major.
Some of you may remember how the stock market reacted to the Brexit referendum in June 2023 as the United Kingdom voted to leave the EU. There was a panic decline for two days that dropped the S&P 5.7% as there was wild conjecture about what it might do to the EU as well as the world economy. Just eight days later the S&P had rallied to a new high as investors realized that the impact of the vote could not be a reality until the next year.
The current situation shares some similarities as if the proposed cabinet members take over their departments in early 2025 their new policy will take time to be implemented. Any future changes for a company like General Dynamics (GD) that had revenue and net income growth of over 10% in its last report did not seem to warrant last week's 7% decline. I think investors who were not panicked into selling last week in reaction to the worst-case scenarios may start to consider buying.
This does not mean that investors or traders can ignore some of last week’s warning signs. I employ a version of the weight of the evidence approach that I learned from Stan Weinstein, a legendary technical analyst, who also developed stage analysis. The daily chart of SPY has major support in the $563 area, line a, and the July high. The chart includes both the daily S&P 500 A/D line as well as the NYSE All A/D line that covers all issues traded on the NYSE.
Both A/D lines have been in solid uptrend for most of the year but both made new highs on October 18th before correcting ahead of the election. The S&P 500 held above the early October lows before moving sharply higher in reaction to the election. The A/D numbers post-election were not strong enough to take the A/D lines above the prior highs.
The S&P 500 Advance/Decline line failed to make a new high on November 11th and then dropped back below its EMA. This created a negative or bearish divergence, line b. This would be confirmed by a decline below the recent lows as that would start a new downtrend (lower high and lower lows) There is longer-term support at line c.
The NYSE All A/D line shows a similar negative divergence, line d, even though it has different components. The late October lows in the NYSE All A/D line were a bit lower which is a negative sign that favors further weakness.
Included in my weight of the evidence is also the NYSE Stocks Only advance/decline line as well as those for the Russell 2000, Dow Industrials, and the Nasdaq 100. This tech-heavy index is tracked by the Invesco QQQ Trust (QQQ) which has been a leader for much of the bull market.
QQQ did close Friday below the mid-point of the prior weekly bar at $499 with the positively rising 20-week EMA at $481.43. The weekly starc- band is at $459.57. The Nasdaq 100 A/D line did make a new high a week ago so no divergences were formed. It is still in a weekly uptrend and above its WMA. The A/D line staged an upside breakout in September, line b, which was a sign of strength.
The extent of the current decline may depend on the bond market which will be the focus of a new article this week. The extent of some declines last week reinforces the necessity of using stops on all trading positions. I use wider stops on existing investment positions.
Those who are concerned about any trading positions after last week I would consider using stops under the most recent low if the market moves higher early in the week. A violation of last week’s lows after a bounce will increase the odds of further selling.
