The stock market continued to chug higher last week, powered by good earnings from a number of big banks on Friday and the release of March's FOMC minutes, which were uncontroversial. There might be disappointing earnings that will cause the market to pause in the next few weeks, but overall, I think the earnings season will be better than most expect.
The market is starting to get overextended, which is not surprising, as there has been very little correction since the start of the year. The Spyder Trust (SPY) had a high on Friday of $290.48, which was just above the September 21 high of $290.24.
Many of the market-tracking ETFs in the table above are getting closer to their weekly starc bands. The starc bands are a tool developed by the late Manning Stoller that were designed to identify price extremes. When prices are at or above the starc+ band (upper band) they are in a high-risk buy area, and considered overbought. If, on the other hand, prices are at or below the starc- band (lower band), they are in a high-risk sell zone and oversold.
On the chart, I have highlighted in yellow (area a) when the SPY traded above its weekly starc+ band for four consecutive weeks in January 2018. This was followed by a very sharp market decline. There have been only ten weeks since 2016 when the price of SPY exceeded its weekly starc+ band.
As noted on the initial table, SPY closed just 2.0% below its weekly starc+ band, so a rally this week could take it above its starc+ band. The Invesco QQQ Trust (QQQ) and NYSE Composite are just 2.3% and 2.4% below their weekly starc+ bands. All of this shows that the market is not yet overextended, but could become so in the next several weeks.
Right now, the weekly technical studies are still clearly positive. The S&P 500 advance/decline line moved above the September 2018 high (line b) on February 1. Having followed and taught about the advance/decline for over 30 years, this was a signal that the S&P 500 would also eventually make a new high. The S&P 500 closed Friday just 0.8% below its all-time high.
There are other signs that the market risk has increased. The CBOE Volatility Index (VIX), frequently referred to as the “Fear Index”, closed on Friday at 12.01. This is the lowest level since last October. It is still above the August 2018 low of 11.64 (level a). As we've previously discussed, when VIX peaks at high levels, it often coincides with a market low. The declining 20-week EMA at 15.86 is the first level to watch for signs of increased market bearishness.
The small cap iShares Russell 2000 (IWM) is up just over 18% YTD but with the close at $157.68 on Friday, it is still 9% below the August 2018 high. The rally over the past two weeks has completed the flag formation, which has upside targets in the $160-$162 area.
The Russell 2000 A/D line is the only major A/D line that has not made a new high in 2019. It is still well below the high from last August (line a). It is also slightly below the February high, which makes the action over the next few weeks more important.
The rally in the stock market from the March 27 lows has coincided with a rise in the 10-Year T-Note Yield. The 60-minute chart of yields and the June S&P futures shows that they both bottomed on that Wednesday morning.
Yields had pulled back to a low of 2.463% last Wednesday (point a), before turning sharply higher late in the week as the yield closed at 2.560%. Surprisingly, S&P futures buyers were still willing to buy, despite rising rates. The June S&P 500 futures had a low early Wednesday of 2877 but then closed Friday at 2911.75.
There is full week of economic data that could impact the path of interest rates. On Thursday we get Retail Sales, the Philadelphia Fed Business Outlook Survey and the Leading Economic Indicators.
The June crude oil contract closed higher for the fifth week in a row, as more are now worrying about summer gas prices. The weekly technical action of the crude oil futures continues to be positive. Friday’s announcement that Chevron (CVX) was buying Andarko Petroleum (APC) for $33 billion has given the oil stocks a boost, as it raises the possibility of further acquisitions.
The consumer is still positive about the economy and is still buying, as the Consumer Discretionary Sector Fund (XLY) is up 19.1% YTD. As I pointed out on April 1 (Still Betting On The Consumer), the weekly technical studies were strong and rising. There are a number of specialty retail stocks that still look good.
Those who followed the four-week dollar-cost averaging plan I recommended before Christmas, are still 75% long at an average price of 2497 based on the S&P 500. On February 25, 25% of the position was sold when the S&P 500 moved above 2805. As a stop on the position, sell the remaining position if the S&P 500 has a weekly close below 2712, which is the new Quarterly Pivot (Qpivot).
Despite the strong rally in the S&P 500 and Nasdaq 100 there are still a number of stocks that have just completed their corrections. This gives them excellent upside potential with good control over the risk.