Market Week In Review - 1/11/2021 - 1/15/2021
The Market Week in Review is my weekend homework where I look over what happened in the previous week and what might come in the next week. It helps me evaluate my observations, recognize new data points, and create a plan for possible scenarios in the future.
I do occasionally have some errors or typos and will correct them in my blog or in the comments on TradingView. I do not have an editor and do this in my free time.
If you find this helpful, please let me know in the comments. I am also more than happy to add new perspectives and data points if you have ideas.
The structure is the following:
If you have been following my daily updates, you can skip down to the “The Meaning of Life”. If not, then this first part is a great play-by-play recap for the week. Click the original charts for more detail each day.
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Monday, January 11, 2021
Facts: -1.25%, Volume lower, Closing range: 27%, Body: 9%
Good: Lower volume, stayed above 13k
Bad: Morning gains turn to a new intraday low before close
Highs/Lows: Lower high, lower low
Candle: Bearish inside day, thing body at bottom of candle
Advance/Decline: 0.83, more declining than advancing
Indexes: SPX (-0.66%), DJI (-0.29%), RUT (-0.03%), VIX (+11.69%)
Sectors: Energy (XLE +1.57%) and Health Services (XLV +0.47%) were top. Communications (XLC -1.78%) and Consumer Discretionary (XLY -1.87%) were bottom.
Expectation: Sideways or Lower
It was tough to have any expectation coming into today's trading session. Nervousness about what will happen in DC on top of continuing pandemic pressures over the weekend resulted in a low start to the day. Confidence grew as buyers came in but ultimately the bears ruled the day, bringing the index back down to a new intraday low before close.
The index closed with a -1.25% loss on lower volume. The bearish day resulted in a 27% closing range where the close is just under the open. The 9% body and long upper wick show the morning buying turning to afternoon selling. More stocks declined than advanced.
The S&P 500 (SPX) and Dow Jones Industrial (DJI) had similar patterns, but closed the day with smaller losses. The Russell 2000 (RUT) also had a loss but with a more bullish look and the smallest loss of the four indexes. The VIX volatility Index rose +11.69%.
Energy (XLE +1.57%) and Health Services (XLV +0.47%) were the top sectors for the day. Crude Oil prices continuing to rise helped Energy take the top spot after a morning dip. Financials (XLF +0.32%) was the only other sector to gain for the day. Communications (XLC -1.78%) and Consumer Discretionary (XLY -1.87%) were bottom.
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Tuesday, January 12, 2021
Facts: +0.28%, Volume higher, Closing range: 77%, Body: 7%
Good: Close in upper side of range, dipped just briefly below 13,000
Bad: Thin body, second indecisive day, LH/LL
Highs/Lows: Lower high, lower low
Candle: An indecisive candle with close just above open, long lower shadow
Advance/Decline: 2.23, more than two advancing for every declining stock
Indexes: SPX (+0.04%), DJI (+0.19%), RUT (+1.77%), VIX (-3.11%)
Sectors: Energy (XLE +3.49%) and Consumer Discretionary (XLY +1.53%) were top. Communications (XLC -1.61%) and Health Services (XLV -1.09%)
Expectation: Sideways
If you are invested in growth stocks and small caps you are probably delighted, but it may be a bit confusing to look at the indexes. The growth and small cap segments did exceptionally well, but the major indexes show an indecisive day. The Nasdaq dipped mid-day but finished just above its open.
The index closed up +0.28% on higher volume. The closing range of 77% is a positive, but the 7% body displays the indecisiveness. However, the advance/decline number of 2.23 shows a much more bullish picture, raising questions whether the broader market can continue to advance without the bigger players advancing.
Another way to see the power of the small-caps is the Russell 2000 (RUT) index that soared above the other indexes with a +1.77% gain and a fat green candle with no lower wick and a tiny upper wick. The S&P 500 (SPX) and Dow Jones Industrial (DJI) had smaller gains than the Nasdaq, all show indecisive candles.
Energy (XLE +3.49%) and Consumer Discretionary (XLY +1.53%) were the top sectors of the day. Communications (XLC -1.61%) and Health Services (XLV -1.09%) were at the bottom.
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Wednesday, January 13, 2021
Facts: +0.43%, Volume lower, Closing range: 65%, Body: 34%
Good: Never revisited morning low, close in upper half of candle
Bad: Nothing, just not exciting
Highs/Lows: Higher high, Higher low
Candle: Medium to small body with longer upper wick than lower wick
Advance/Decline: 0.85, more declining stocks than advancing stocks
Indexes: SPX (+0.04%), DJI (+0.19%), RUT (+1.77%), VIX (-3.11%)
Sectors: Utilities (XLU +1.95%) and Real Estate (XLRE +1.37%) were top. Industrials (XLI -0.86%) and Materials (XLB -1.02%) were bottom.
Expectation: Sideways
It was not a very exciting session for the Nasdaq today, but there were certainly pockets of excitement in parts of the market. The brief climb in the morning for Nasdaq turned to a sideways movement for the rest of the day. The good news is that the index never went back down towards the morning low. However, the gains for mega-caps and some growth stocks were not broadly shared across the market, keeping the index from closing closer to the intraday highs.
The index closed with a +0.43% gain on lower volume. The closing range was 65% with a green body covering 34% of the candle. More stocks declined than advanced on the Nasdaq. Another way to see the influence of the mega caps today is to look at the cap weighted QQQ (+0.68%) vs the equal weight QQQE (-0.01%).
The S&P 500 (SPX) gained +0.23% while the Dow Jones Industrial lost (DJI) -0.10%. The Russell 2000 (RUT) lost -0.75% as money rotated into larger cap stocks today.
Utilities (XLU +1.95%) and Real Estate (XLRE +1.37%) were the top sectors. Often these sectors are at the top when investors get a bit nervous, but don't want to exit the equities market. The worst performing sectors were Industrials ( XLI -0.86%) and Materials ( XLB -1.02%).
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Thursday, January 14, 2021
Facts: -0.12%, Volume lower, Closing range: 12%, Body: 51%
Good: New all-time high, higher low
Bad: Closing range, sell-off to close after morning all-time high
Highs/Lows: Higher high, Higher low
Candle: Thick red body in lower half of the candle, longer upper wick
Advance/Decline: 2.50, five advancing stocks for every two declining stocks.
Indexes: SPX (-0.38%), DJI (-0.22%), RUT (+2.05%), VIX (+4.68%)
Sectors: Energy (XLE +2.96%) and Real Estate (XLRE +0.62%) were top. Consumer Discretionary (XLY -0.64%) and Technology (XLK -0.88%) were bottom.
Expectation: Sideways
Investors shook off bad employment news in the morning to drive indexes to all-time highs before an afternoon session of selling. There were plenty of gains across a breadth of stocks, but the losses in the mega-caps weighed down the major indexes. The exception was the small-cap Russell 2000 which gained +2.05% in a solidly upwards session.
The Nasdaq closed with a -0.12% loss after setting a new all-time high. The closing range of 12% with a large 51% red body is sign of weakness, but volume was lower so would not count as a distribution day. The losses were focused in the larger caps which is why the overall index is down even though there were far more advancing stocks than declining stocks. As we did yesterday, you can also see the imbalance by looking at the QQQ which is down -0.53% while the equal weight QQQE is up +0.12%.
The S&P 500 (SPX) lost -0.38% while the Dow Jones Industrial average (DJI) lost -0.22%. The VIX Volatility index rose +4.68%.
Energy (XLE +2.96%) was the top sector after OPEC released their monthly report with a mix of messages around oil demand and shale output. Real Estate (XLRE +0.62%) was the second best sector. Consumer Discretionary (XLY -0.64%) and Technology (XLK -0.88%) were the worst performing sectors.
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Friday, January 15, 2021
Facts: -0.87%, Volume lower, Closing range: 26%, Body: 53%
Good: Held lows near 13,000
Bad: Bearish in early morning and afternoon selling, low closing range, thick red body
Highs/Lows: Lower high, lower low
Candle: Thick red body, equal upper and lower wicks
Advance/Decline: 0.45, two declining stocks for every advancing stock.
Indexes: SPX (-0.72%), DJI (+0.30%), RUT (-1.49%), VIX (+4.69%)
Sectors: Real Estate (XLRE +1.54%) and Utilities (XLU +0.98%) were top. Energy (XLE -3.89%) and Financials (XLF -1.65%) were bottom
Expectation: Sideways or Lower
The market took a step back at the end of a week, after moving sideways most of the week. It wasn't a huge move downward, but was certainly a bearish looking day across indexes and market indicators.
The Nasdaq closed with a -0.87% loss on lower volume. The closing range was 26% and a thick red body of 53% that sits in the middle of the candle. The short upper and lower wicks show some effort by the bulls to buy up dips and move the market upwards. But with two declining stocks for every advancing stock, the result is a bearish candle to end the week.
The S&P 500 (SPX) lost -0.72% while the Dow Jones Industrial average (DJI) gained +0.30%. The Dow Jones gains were primarily from a few mega-cap stocks that had positive gains and are heavily weighted within the index. The Russell 2000 (RUT) lost -1.49%. The VIX Volatility index rose +4.69%.
Real Estate (XLRE +1.54%) and Utilities (XLU +0.98%) were top, two sectors used as defensive strategies for investors. Energy (XLE -3.89%) and Financials (XLF -1.65%) were bottom after leading much of the week.
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The Meaning of Life (View on the Week)
This was a good week to pause and realize the benefit of why I spend this time on the weekend to walk back thru the week and look at the bigger picture. The week was a mix of ups and downs depending on what types of investments are the focus in your portfolio. Week over week, the Nasdaq lost -1.54% with a closing range of 18% and a negative body of 18.6%. Those are not great stats. However, when you look at the week as a whole, there are a variety of positive signs both in the charts as well as the market indicators.
The first four days of the week trend upward and set a new all-time high on Thursday. The high of the week is higher than last week's high and the low of the week is higher than last week's low. Energy (XLE) and Financials (XLF) led the sectors for most of the week. These are two sectors that are signals of economic recovery.
So what happened on Friday? There were several catalysts to the end of the week sell-off. Some of it had to do with sector rotation. First, the SEC announced an investigation into Exxon Mobil (XOM) which weighted down the Energy sector. Exxon Mobil makes up 23% of the XLE ETF that I use to track the sector, and as people reduce their exposure to the sector it will impact many of the stocks in that sector. It didn't help that Tesla (TSLA) caused a sell-off of solar energy stocks after they announced they'll produce their own inverter for customers.
It was a similar story for Financials. Before market open, Citigroup (C) and Wells Fargo (WFC) released earnings announcements that showed they beat earnings expectations but fell short on revenue. Investors were not pleased with the revenue and reduced their exposure to the Financials sector.
The third catalyst was investor sentiment heading into a three-day weekend that precedes what could be a tumultuous week for the US. There are a few places you can see that sentiment displayed. For sectors, Utilities (XLU) and Real Estate (XLRE) were gaining on other sectors throughout the week and outperformed on Friday. These sectors are defensive plays. US02Y and US05Y treasury bond yields, as well as longer term bond yields, all dropped for the week as investors moved to the safe haven investments.
Friday was also an expiration day for option contracts. With the put/call ratio being quite low (many more calls than puts) over the past several weeks, and many of the large mega-caps moving sideways, it's very possible that a high number of call contracts expired without meeting the strike price. Market makers may sell the underlying stocks to keep prices lower than the strike and also reduce exposure to the a stock they no longer need to cover for worthless contracts.
All of that to say (as much to myself as to the reader), don't worry about Friday's minor pullback, even if it hit some of your positions more than the market dip.
The Russell 2000 (RUT) continued its leadership among the indexes with a +1.51% gain for the week. The S&P 500 lost -1.48% while the Dow Jones Industrial average lost -0.57% for the week.
You can see the bearish end to the week in the weekly chart with the low closing range and long upper-wick formed after selling from Thursday's high. You can also see that we have a higher high and a higher low than the previous week. That's an uptrend. Looking at the volume is another key characteristic. Note that bullish green bars have higher volume than bearish red bars. Even at the daily level, this past week had higher volume on bullish days than on bearish days.
The sectors had a wild race this week with the backdrop of a up and down market with several rotations between small caps, mid caps and large caps.
Energy ( XLE ) would ultimately be the winner, supported by production cuts in Saudi Arabia, higher than expected demand for oil , and some positive news from OPEC. There was a significant pullback on Friday after SEC announced an investigation into Exxon Mobile ( XOM ) which makes up 23% of the XLE ETF .
Financials ( XLF ) led must of the week as investors expect higher treasury yields boost performance for big banks. That turned upside down on Friday when Citigroup (C) and Wells Fargo ( WFC ) disappointed on revenue despite beating expectations on earnings .
It was Real Estate ( XLRE ) and Utilities ( XLU ) that started to climb on Tuesday and were top performers on Friday. Those two sectors are defensive plays for equity investors. Both are expected to suffer less from market pullbacks.
Materials ( XLB ) and Industrials ( XLI ) were also doing well earlier in the week, but pulled back on Friday. It could be that the nearly $2 trillion of stimulus promised by President-elect Biden is seen as a delay to the expected investments in infrastructure. Just a theory.
Technology ( XLK ) and Communications ( XLC ) were at the bottom. The big tech mega-caps went up and down in price all week as money moved in and out of the segment. Communications, which includes companies like Facebook ( FB ) and Twitter ( TWTR ) suffered the most as investors fear negative impact of recent actions related to Donald Trump.
US Treasury Bond yields dropped for the week as investors moved into the instrument. The purchasing could be a combination of reaction to the Fed continuing bond buying. It can also be due to the sharp increase in value of the US Dollar after hitting recent lows last week. And some of it could be as a viable safe haven from volatility in the stock market.
Prices for high yield corporate bonds (HYG) declined while investment grade (LQD) corporate bonds increased. In addition to the increased prices of short term treasury bonds (IEI), it signals investors moving to less riskier assets.
The US Dollar (DXY) rose +0.70% for the week.
The put/call ratio (PCCE) ended the week at 0.657. The is a much better number than the previous week which was showing too much optimism. A contrarian indicator, when the put/call ratio is below 0.7, it signals overly bullish sentiment which typically proceeds a pullback in the market. The indicator was at 0.458 just before the September correction and it was at 0.489 just before the short October correction.
Silver (SILVER) was down -2.65% and Gold (GOLD) was down -1.13%. Crude Oil futures were up +0.69%.
Timber (WOOD) was down -3.01%. Copper (COPPER!1) dropped -2.76% while Aluminum (ALI1!) was down -2.42%.
A question for me all week has been will the big tech mega-caps continue to weigh on the indexes, or will they start to participate in the market rally that's been ongoing for the past 10-11 weeks. And on the flip side, can the rally continue without them. Looking at the Relative Candle indicator at the bottom of each chart, you can see they have lagged behind the Nasdaq (Alphabet had several weeks of outperforming).
Each of the mega-caps has been forming a consolidation pattern where lows are getting closer to highs while volume is contracting. That’s a classic pattern of reduction in sellers as buyers take the opportunity to increase positions, holding prices up.
Earnings dates approach for these giants later in January. MSFT on 1/26, AAPL on 1/27, AMZN on 1/30 and GOOGL on 2/2. Those dates could be pivotal for the mega-caps to get back in the game. Or they could be a breakdown that pulls the indexes with them.
The above charts show an important pivot that occurred the week of August 3, 2020. The top chart shows the performance of Value stocks in the S&P 500 vs the rest of S&P 500 stocks. You can see that value stocks have underperformed since 2008, but even more so in 2020 prior to August 3.
In the bottom chart, you see the QQQ ETF which is based on the Nasdaq 100, weighted on market cap (more representation for larger cap companies) and the QQQE ETF which is equal weighted across the Nasdaq 100. This shows the rotation of investment from larger caps to a more broad investment across the market which has driven recent gains.
Not included here, but you can do a similar comparison of the Russell 2000 (RUT) small cap vs the S&P 500 and see the same pivot.
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The Week Ahead
Markets are closed on Monday for Martin Luther King Jr. day.
Next week will bring the inauguration of President-elect Biden. The transition on Wednesday will lead to several executive decisions being made over the next week. Those decisions will impact sectors such as Energy, Industrials, Materials and Technology. Some to the positive, some to the negative.
Wednesday will also bring updates on Crude Oil Inventories. Thursday will include Fed Manufacturing data, Employment Data and December data for Building Permits and Housing Starts. On Friday, we'll have more updates on Manufacturing activity, Services activity, and Existing Homes Sales.
Earnings activity will pick up next week and continue for the next several weeks. There will be more earnings announcements from big banks, including Bank of America (BAC), Goldman Sachs (GS) on Tuesday before market open. Netflix (NFLX) will announce earnings after market close on Tuesday. Procter & Gamble (PG), United Health (UNH) and Morgan Stanley (MS) on Wednesday.
Intel (INTC), IBM (IBM) and Citrix Systems (CTXS) kick-off big tech stock earnings on Thursday.
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The Bullish Side
A higher high and a higher low. The index continues to move in an upward trend despite a pause this week with a slight pullback on Friday. The uptrend continues despite turmoil in politics and the worsening pandemic.
The fed has continued its policy of not raising interest rates and continuing to buy back bonds. This is keeping liquidity in the markets while further stimulus will add to economic activity. Many analysts are questioning whether further stimulus is even needed as the economy seems to be getting back on track.
Wednesday will mark the new administration which will bring immediate actions to further support economic recovery. Those will range from increased focus on ending the pandemic as well as stimulus to small businesses and individuals.
Although the big mega-caps have not participated in the rally, and in some cases weighed down the index, they still have plenty of support and could break out of consolidation patterns at any moment.
So the markets continue to rise. The index has closed above the 21d EMA for 50 consecutive days. That's 11 weeks of rally, that hasn't yet shown signs of backing down.
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The Bearish Side
Investors are clearly worried about what is to come in the near future. The defensive plays in Utilities and Real Estate as well as the move from risky investments to safer Treasury Bonds and Investment Grade Corporate Bonds is a clear sign of that nervousness. It may not take much for investors to go further and begin selling off equities in favor of bonds or commodities.
The implementation of Biden's policies in the coming weeks can have both positive and negative impacts. Energy that has been leading the sectors for so many weeks is likely to be impacted, on top of the Exxon Mobil investigation launched last week.
At the same time, policies that require the support of congress may be delayed due to the impeachment trial that will start this week. Those may include delays to further stimulus, infrastructure projects and programs to reduce unemployment.
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Key Nasdaq Levels to Watch
There are several key levels in the Nasdaq to keep an eye out for and respond accordingly. First on the positive side:
On the downside, there are several key levels to raise caution flags:
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Wrap-up
Wednesday's inauguration will hopefully end some of the turmoil in the markets that we've experienced over the last few months. It doesn't guarantee that prices move up, but at least there might be a reduction in the number of surprises that have pivoted investors in various directions since early November.
For now, we are still in an uptrend. There are positive signs that the rally will continue. Follow price. Have a plan for all the stocks in your portfolio depending on your investment style and risk tolerance.
Good luck, stay healthy and trade safe!
I do occasionally have some errors or typos and will correct them in my blog or in the comments on TradingView. I do not have an editor and do this in my free time.
If you find this helpful, please let me know in the comments. I am also more than happy to add new perspectives and data points if you have ideas.
The structure is the following:
- A recap of the daily updates that I do here on TradingView.
- The Meaning of Life, a view on the past week
- What's coming in the next week
- The Bullish View, The Bearish View
- Key index levels to watch out for
- Wrap-up
If you have been following my daily updates, you can skip down to the “The Meaning of Life”. If not, then this first part is a great play-by-play recap for the week. Click the original charts for more detail each day.
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Monday, January 11, 2021
Facts: -1.25%, Volume lower, Closing range: 27%, Body: 9%
Good: Lower volume, stayed above 13k
Bad: Morning gains turn to a new intraday low before close
Highs/Lows: Lower high, lower low
Candle: Bearish inside day, thing body at bottom of candle
Advance/Decline: 0.83, more declining than advancing
Indexes: SPX (-0.66%), DJI (-0.29%), RUT (-0.03%), VIX (+11.69%)
Sectors: Energy (XLE +1.57%) and Health Services (XLV +0.47%) were top. Communications (XLC -1.78%) and Consumer Discretionary (XLY -1.87%) were bottom.
Expectation: Sideways or Lower
It was tough to have any expectation coming into today's trading session. Nervousness about what will happen in DC on top of continuing pandemic pressures over the weekend resulted in a low start to the day. Confidence grew as buyers came in but ultimately the bears ruled the day, bringing the index back down to a new intraday low before close.
The index closed with a -1.25% loss on lower volume. The bearish day resulted in a 27% closing range where the close is just under the open. The 9% body and long upper wick show the morning buying turning to afternoon selling. More stocks declined than advanced.
The S&P 500 (SPX) and Dow Jones Industrial (DJI) had similar patterns, but closed the day with smaller losses. The Russell 2000 (RUT) also had a loss but with a more bullish look and the smallest loss of the four indexes. The VIX volatility Index rose +11.69%.
Energy (XLE +1.57%) and Health Services (XLV +0.47%) were the top sectors for the day. Crude Oil prices continuing to rise helped Energy take the top spot after a morning dip. Financials (XLF +0.32%) was the only other sector to gain for the day. Communications (XLC -1.78%) and Consumer Discretionary (XLY -1.87%) were bottom.
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Tuesday, January 12, 2021
Facts: +0.28%, Volume higher, Closing range: 77%, Body: 7%
Good: Close in upper side of range, dipped just briefly below 13,000
Bad: Thin body, second indecisive day, LH/LL
Highs/Lows: Lower high, lower low
Candle: An indecisive candle with close just above open, long lower shadow
Advance/Decline: 2.23, more than two advancing for every declining stock
Indexes: SPX (+0.04%), DJI (+0.19%), RUT (+1.77%), VIX (-3.11%)
Sectors: Energy (XLE +3.49%) and Consumer Discretionary (XLY +1.53%) were top. Communications (XLC -1.61%) and Health Services (XLV -1.09%)
Expectation: Sideways
If you are invested in growth stocks and small caps you are probably delighted, but it may be a bit confusing to look at the indexes. The growth and small cap segments did exceptionally well, but the major indexes show an indecisive day. The Nasdaq dipped mid-day but finished just above its open.
The index closed up +0.28% on higher volume. The closing range of 77% is a positive, but the 7% body displays the indecisiveness. However, the advance/decline number of 2.23 shows a much more bullish picture, raising questions whether the broader market can continue to advance without the bigger players advancing.
Another way to see the power of the small-caps is the Russell 2000 (RUT) index that soared above the other indexes with a +1.77% gain and a fat green candle with no lower wick and a tiny upper wick. The S&P 500 (SPX) and Dow Jones Industrial (DJI) had smaller gains than the Nasdaq, all show indecisive candles.
Energy (XLE +3.49%) and Consumer Discretionary (XLY +1.53%) were the top sectors of the day. Communications (XLC -1.61%) and Health Services (XLV -1.09%) were at the bottom.
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Wednesday, January 13, 2021
Facts: +0.43%, Volume lower, Closing range: 65%, Body: 34%
Good: Never revisited morning low, close in upper half of candle
Bad: Nothing, just not exciting
Highs/Lows: Higher high, Higher low
Candle: Medium to small body with longer upper wick than lower wick
Advance/Decline: 0.85, more declining stocks than advancing stocks
Indexes: SPX (+0.04%), DJI (+0.19%), RUT (+1.77%), VIX (-3.11%)
Sectors: Utilities (XLU +1.95%) and Real Estate (XLRE +1.37%) were top. Industrials (XLI -0.86%) and Materials (XLB -1.02%) were bottom.
Expectation: Sideways
It was not a very exciting session for the Nasdaq today, but there were certainly pockets of excitement in parts of the market. The brief climb in the morning for Nasdaq turned to a sideways movement for the rest of the day. The good news is that the index never went back down towards the morning low. However, the gains for mega-caps and some growth stocks were not broadly shared across the market, keeping the index from closing closer to the intraday highs.
The index closed with a +0.43% gain on lower volume. The closing range was 65% with a green body covering 34% of the candle. More stocks declined than advanced on the Nasdaq. Another way to see the influence of the mega caps today is to look at the cap weighted QQQ (+0.68%) vs the equal weight QQQE (-0.01%).
The S&P 500 (SPX) gained +0.23% while the Dow Jones Industrial lost (DJI) -0.10%. The Russell 2000 (RUT) lost -0.75% as money rotated into larger cap stocks today.
Utilities (XLU +1.95%) and Real Estate (XLRE +1.37%) were the top sectors. Often these sectors are at the top when investors get a bit nervous, but don't want to exit the equities market. The worst performing sectors were Industrials ( XLI -0.86%) and Materials ( XLB -1.02%).
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Thursday, January 14, 2021
Facts: -0.12%, Volume lower, Closing range: 12%, Body: 51%
Good: New all-time high, higher low
Bad: Closing range, sell-off to close after morning all-time high
Highs/Lows: Higher high, Higher low
Candle: Thick red body in lower half of the candle, longer upper wick
Advance/Decline: 2.50, five advancing stocks for every two declining stocks.
Indexes: SPX (-0.38%), DJI (-0.22%), RUT (+2.05%), VIX (+4.68%)
Sectors: Energy (XLE +2.96%) and Real Estate (XLRE +0.62%) were top. Consumer Discretionary (XLY -0.64%) and Technology (XLK -0.88%) were bottom.
Expectation: Sideways
Investors shook off bad employment news in the morning to drive indexes to all-time highs before an afternoon session of selling. There were plenty of gains across a breadth of stocks, but the losses in the mega-caps weighed down the major indexes. The exception was the small-cap Russell 2000 which gained +2.05% in a solidly upwards session.
The Nasdaq closed with a -0.12% loss after setting a new all-time high. The closing range of 12% with a large 51% red body is sign of weakness, but volume was lower so would not count as a distribution day. The losses were focused in the larger caps which is why the overall index is down even though there were far more advancing stocks than declining stocks. As we did yesterday, you can also see the imbalance by looking at the QQQ which is down -0.53% while the equal weight QQQE is up +0.12%.
The S&P 500 (SPX) lost -0.38% while the Dow Jones Industrial average (DJI) lost -0.22%. The VIX Volatility index rose +4.68%.
Energy (XLE +2.96%) was the top sector after OPEC released their monthly report with a mix of messages around oil demand and shale output. Real Estate (XLRE +0.62%) was the second best sector. Consumer Discretionary (XLY -0.64%) and Technology (XLK -0.88%) were the worst performing sectors.
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Friday, January 15, 2021
Facts: -0.87%, Volume lower, Closing range: 26%, Body: 53%
Good: Held lows near 13,000
Bad: Bearish in early morning and afternoon selling, low closing range, thick red body
Highs/Lows: Lower high, lower low
Candle: Thick red body, equal upper and lower wicks
Advance/Decline: 0.45, two declining stocks for every advancing stock.
Indexes: SPX (-0.72%), DJI (+0.30%), RUT (-1.49%), VIX (+4.69%)
Sectors: Real Estate (XLRE +1.54%) and Utilities (XLU +0.98%) were top. Energy (XLE -3.89%) and Financials (XLF -1.65%) were bottom
Expectation: Sideways or Lower
The market took a step back at the end of a week, after moving sideways most of the week. It wasn't a huge move downward, but was certainly a bearish looking day across indexes and market indicators.
The Nasdaq closed with a -0.87% loss on lower volume. The closing range was 26% and a thick red body of 53% that sits in the middle of the candle. The short upper and lower wicks show some effort by the bulls to buy up dips and move the market upwards. But with two declining stocks for every advancing stock, the result is a bearish candle to end the week.
The S&P 500 (SPX) lost -0.72% while the Dow Jones Industrial average (DJI) gained +0.30%. The Dow Jones gains were primarily from a few mega-cap stocks that had positive gains and are heavily weighted within the index. The Russell 2000 (RUT) lost -1.49%. The VIX Volatility index rose +4.69%.
Real Estate (XLRE +1.54%) and Utilities (XLU +0.98%) were top, two sectors used as defensive strategies for investors. Energy (XLE -3.89%) and Financials (XLF -1.65%) were bottom after leading much of the week.
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The Meaning of Life (View on the Week)
This was a good week to pause and realize the benefit of why I spend this time on the weekend to walk back thru the week and look at the bigger picture. The week was a mix of ups and downs depending on what types of investments are the focus in your portfolio. Week over week, the Nasdaq lost -1.54% with a closing range of 18% and a negative body of 18.6%. Those are not great stats. However, when you look at the week as a whole, there are a variety of positive signs both in the charts as well as the market indicators.
The first four days of the week trend upward and set a new all-time high on Thursday. The high of the week is higher than last week's high and the low of the week is higher than last week's low. Energy (XLE) and Financials (XLF) led the sectors for most of the week. These are two sectors that are signals of economic recovery.
So what happened on Friday? There were several catalysts to the end of the week sell-off. Some of it had to do with sector rotation. First, the SEC announced an investigation into Exxon Mobil (XOM) which weighted down the Energy sector. Exxon Mobil makes up 23% of the XLE ETF that I use to track the sector, and as people reduce their exposure to the sector it will impact many of the stocks in that sector. It didn't help that Tesla (TSLA) caused a sell-off of solar energy stocks after they announced they'll produce their own inverter for customers.
It was a similar story for Financials. Before market open, Citigroup (C) and Wells Fargo (WFC) released earnings announcements that showed they beat earnings expectations but fell short on revenue. Investors were not pleased with the revenue and reduced their exposure to the Financials sector.
The third catalyst was investor sentiment heading into a three-day weekend that precedes what could be a tumultuous week for the US. There are a few places you can see that sentiment displayed. For sectors, Utilities (XLU) and Real Estate (XLRE) were gaining on other sectors throughout the week and outperformed on Friday. These sectors are defensive plays. US02Y and US05Y treasury bond yields, as well as longer term bond yields, all dropped for the week as investors moved to the safe haven investments.
Friday was also an expiration day for option contracts. With the put/call ratio being quite low (many more calls than puts) over the past several weeks, and many of the large mega-caps moving sideways, it's very possible that a high number of call contracts expired without meeting the strike price. Market makers may sell the underlying stocks to keep prices lower than the strike and also reduce exposure to the a stock they no longer need to cover for worthless contracts.
All of that to say (as much to myself as to the reader), don't worry about Friday's minor pullback, even if it hit some of your positions more than the market dip.
The Russell 2000 (RUT) continued its leadership among the indexes with a +1.51% gain for the week. The S&P 500 lost -1.48% while the Dow Jones Industrial average lost -0.57% for the week.
You can see the bearish end to the week in the weekly chart with the low closing range and long upper-wick formed after selling from Thursday's high. You can also see that we have a higher high and a higher low than the previous week. That's an uptrend. Looking at the volume is another key characteristic. Note that bullish green bars have higher volume than bearish red bars. Even at the daily level, this past week had higher volume on bullish days than on bearish days.
The sectors had a wild race this week with the backdrop of a up and down market with several rotations between small caps, mid caps and large caps.
Energy ( XLE ) would ultimately be the winner, supported by production cuts in Saudi Arabia, higher than expected demand for oil , and some positive news from OPEC. There was a significant pullback on Friday after SEC announced an investigation into Exxon Mobile ( XOM ) which makes up 23% of the XLE ETF .
Financials ( XLF ) led must of the week as investors expect higher treasury yields boost performance for big banks. That turned upside down on Friday when Citigroup (C) and Wells Fargo ( WFC ) disappointed on revenue despite beating expectations on earnings .
It was Real Estate ( XLRE ) and Utilities ( XLU ) that started to climb on Tuesday and were top performers on Friday. Those two sectors are defensive plays for equity investors. Both are expected to suffer less from market pullbacks.
Materials ( XLB ) and Industrials ( XLI ) were also doing well earlier in the week, but pulled back on Friday. It could be that the nearly $2 trillion of stimulus promised by President-elect Biden is seen as a delay to the expected investments in infrastructure. Just a theory.
Technology ( XLK ) and Communications ( XLC ) were at the bottom. The big tech mega-caps went up and down in price all week as money moved in and out of the segment. Communications, which includes companies like Facebook ( FB ) and Twitter ( TWTR ) suffered the most as investors fear negative impact of recent actions related to Donald Trump.
US Treasury Bond yields dropped for the week as investors moved into the instrument. The purchasing could be a combination of reaction to the Fed continuing bond buying. It can also be due to the sharp increase in value of the US Dollar after hitting recent lows last week. And some of it could be as a viable safe haven from volatility in the stock market.
Prices for high yield corporate bonds (HYG) declined while investment grade (LQD) corporate bonds increased. In addition to the increased prices of short term treasury bonds (IEI), it signals investors moving to less riskier assets.
The US Dollar (DXY) rose +0.70% for the week.
The put/call ratio (PCCE) ended the week at 0.657. The is a much better number than the previous week which was showing too much optimism. A contrarian indicator, when the put/call ratio is below 0.7, it signals overly bullish sentiment which typically proceeds a pullback in the market. The indicator was at 0.458 just before the September correction and it was at 0.489 just before the short October correction.
Silver (SILVER) was down -2.65% and Gold (GOLD) was down -1.13%. Crude Oil futures were up +0.69%.
Timber (WOOD) was down -3.01%. Copper (COPPER!1) dropped -2.76% while Aluminum (ALI1!) was down -2.42%.
A question for me all week has been will the big tech mega-caps continue to weigh on the indexes, or will they start to participate in the market rally that's been ongoing for the past 10-11 weeks. And on the flip side, can the rally continue without them. Looking at the Relative Candle indicator at the bottom of each chart, you can see they have lagged behind the Nasdaq (Alphabet had several weeks of outperforming).
Each of the mega-caps has been forming a consolidation pattern where lows are getting closer to highs while volume is contracting. That’s a classic pattern of reduction in sellers as buyers take the opportunity to increase positions, holding prices up.
Earnings dates approach for these giants later in January. MSFT on 1/26, AAPL on 1/27, AMZN on 1/30 and GOOGL on 2/2. Those dates could be pivotal for the mega-caps to get back in the game. Or they could be a breakdown that pulls the indexes with them.
The above charts show an important pivot that occurred the week of August 3, 2020. The top chart shows the performance of Value stocks in the S&P 500 vs the rest of S&P 500 stocks. You can see that value stocks have underperformed since 2008, but even more so in 2020 prior to August 3.
In the bottom chart, you see the QQQ ETF which is based on the Nasdaq 100, weighted on market cap (more representation for larger cap companies) and the QQQE ETF which is equal weighted across the Nasdaq 100. This shows the rotation of investment from larger caps to a more broad investment across the market which has driven recent gains.
Not included here, but you can do a similar comparison of the Russell 2000 (RUT) small cap vs the S&P 500 and see the same pivot.
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The Week Ahead
Markets are closed on Monday for Martin Luther King Jr. day.
Next week will bring the inauguration of President-elect Biden. The transition on Wednesday will lead to several executive decisions being made over the next week. Those decisions will impact sectors such as Energy, Industrials, Materials and Technology. Some to the positive, some to the negative.
Wednesday will also bring updates on Crude Oil Inventories. Thursday will include Fed Manufacturing data, Employment Data and December data for Building Permits and Housing Starts. On Friday, we'll have more updates on Manufacturing activity, Services activity, and Existing Homes Sales.
Earnings activity will pick up next week and continue for the next several weeks. There will be more earnings announcements from big banks, including Bank of America (BAC), Goldman Sachs (GS) on Tuesday before market open. Netflix (NFLX) will announce earnings after market close on Tuesday. Procter & Gamble (PG), United Health (UNH) and Morgan Stanley (MS) on Wednesday.
Intel (INTC), IBM (IBM) and Citrix Systems (CTXS) kick-off big tech stock earnings on Thursday.
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The Bullish Side
A higher high and a higher low. The index continues to move in an upward trend despite a pause this week with a slight pullback on Friday. The uptrend continues despite turmoil in politics and the worsening pandemic.
The fed has continued its policy of not raising interest rates and continuing to buy back bonds. This is keeping liquidity in the markets while further stimulus will add to economic activity. Many analysts are questioning whether further stimulus is even needed as the economy seems to be getting back on track.
Wednesday will mark the new administration which will bring immediate actions to further support economic recovery. Those will range from increased focus on ending the pandemic as well as stimulus to small businesses and individuals.
Although the big mega-caps have not participated in the rally, and in some cases weighed down the index, they still have plenty of support and could break out of consolidation patterns at any moment.
So the markets continue to rise. The index has closed above the 21d EMA for 50 consecutive days. That's 11 weeks of rally, that hasn't yet shown signs of backing down.
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The Bearish Side
Investors are clearly worried about what is to come in the near future. The defensive plays in Utilities and Real Estate as well as the move from risky investments to safer Treasury Bonds and Investment Grade Corporate Bonds is a clear sign of that nervousness. It may not take much for investors to go further and begin selling off equities in favor of bonds or commodities.
The implementation of Biden's policies in the coming weeks can have both positive and negative impacts. Energy that has been leading the sectors for so many weeks is likely to be impacted, on top of the Exxon Mobil investigation launched last week.
At the same time, policies that require the support of congress may be delayed due to the impeachment trial that will start this week. Those may include delays to further stimulus, infrastructure projects and programs to reduce unemployment.
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Key Nasdaq Levels to Watch
There are several key levels in the Nasdaq to keep an eye out for and respond accordingly. First on the positive side:
- 13,000 is a support area. The index closed a hair below that point on Friday. Look for it to move above and stay above this area next week.
- The high of Thursday at 13,220.16. Can the index continue to make newer highs each week?
- The index is pausing about every 300-400 points, so expect some resistance around 13,350 - 13,400 area.
- Reach 13,400 would put the index back in the middle of a regression trend from the 10/30 bottom.
On the downside, there are several key levels to raise caution flags:
- The low of last week is 12,949.76. Stay above that line to set a higher low next week.
- 12,860.31 is the 21d EMA. The index stayed clear of the line this past week, even with the dip on Friday.
- 12,550 is an area of support.
- 12,425.34 is the 50d moving average. The 50d moving average is key support line that has not been tested since 11/4. The index is closer to the line after this past weeks pause, which is a good gap to close, but not dip below the line.
- The support area of 12,250 is the next area. It is nearly 6% below Friday's close and would be a signal of correction if we reached that area.
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Wrap-up
Wednesday's inauguration will hopefully end some of the turmoil in the markets that we've experienced over the last few months. It doesn't guarantee that prices move up, but at least there might be a reduction in the number of surprises that have pivoted investors in various directions since early November.
For now, we are still in an uptrend. There are positive signs that the rally will continue. Follow price. Have a plan for all the stocks in your portfolio depending on your investment style and risk tolerance.
Good luck, stay healthy and trade safe!
Website: drewby.com
Twitter: twitter.com/drewrobbins
All ideas are for information purposes only. I may or may not invest in the stocks discussed. Before investing in any stock, do your research and trade using your rules.
Twitter: twitter.com/drewrobbins
All ideas are for information purposes only. I may or may not invest in the stocks discussed. Before investing in any stock, do your research and trade using your rules.
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