Market Week In Review - 1/19/2021 - 1/22/2021The 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:
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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Tuesday, January 19, 2021
Facts: +1.53%, Volume lower, Closing range: 92%, Body: 50%
Good: Solid gains in afternoon after morning low, high closing range
Bad: Nothing
Highs/Lows: Higher high, higher low
Candle: Longer lower wick from morning dip, thick green body from afternoon
Advance/Decline: 2.04, two advancing stocks for every declining stock.
Indexes: SPX (+0.81%), DJI (+0.38%), RUT (+1.32%), VIX (-4.52%)
Sectors: Energy (XLE +2.01%), Communications (XLC +1.81%), and Technology (XLK +1.30%) were top. Real Estate (XLRE -0.66%), Consumer Staples (XLP -0.44%), Utilities (XLU -0.38%) were bottom.
Expectation: Higher
The market started the trading week on a note of optimism after a long weekend. The end of the last week was marked with defensive moves into lower risk sectors and safe haven assets. Today, the opposite moves were made to begin a week that brings a transition for the US, the inauguration of President Biden.
The Nasdaq closed with a +1.53% gain on lower volume. The closing range of 92% and a thick 50% green body are representative of the confident buying in the afternoon that produced the bullish session. The lows in the morning were just above Friday's open. After testing that low three times in the morning, the index finally turned to the upside for the rest of the session. There were two advancing stocks for every declining stock.
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Wednesday, January 20, 2021
Facts: +1.97%, Volume higher, Closing range: 90%, Body: 73%
Good: Gains the whole day and closing near the top of the range
Bad: Gap up
Highs/Lows: Higher high, higher low
Candle: Mostly green body with a tiny lower wick and more visible upper wick from some selling at close
Advance/Decline: 1.29, more advancing stocks than declining stock.
Indexes: SPX (+1.39%), DJI (+0.83%), RUT (+0.44%), VIX (-7.14%)
Sectors: Communications (XLC +3.14%) and Real Estate (XLRE +2.08%) were top. Financials (XLF -0.42%) was the only losing sector.
Expectation: Sideways or Higher
If the equity market could talk, I think it would say Happy Inauguration Day. Investors breathed a sigh of relief that maybe some of the turmoil is behind us. That sentiment translated into a gap up at open with steady gains throughout the day.
The Nasdaq closed with a big +1.97% gain on higher volume. The candle has a closing ranging of 82%, but including the gap the actual closing range is even better at 90%. The 73% green body and tiny lower wick shows the nearly constant gains that happened throughout the trading session. There were more advancing stocks than declining stocks, but note that the breadth was not as wide as the previous day.
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Thursday, January 21, 2021
Facts: +0.55%, Volume higher, Closing range: 72%, Body: 9%
Good: New all-time high, support at yesterday's close for higher low
Bad: Thin body, indecisive candle
Highs/Lows: Higher high, higher low
Candle: Thin green body with visible upper and lower wicks could be a spinning top
Advance/Decline: 0.79, more declining stocks than advancing stocks.
Indexes: SPX (+0.03%), DJI (-0.04%), RUT (-0.89%), VIX (-1.20%)
Sectors: Technology (XLK +1.29%), Consumer Discretionary (XLY +0.47%), and Communications (XLC +0.35%) were the only advancing sectors. Energy (XLE -3.38%) was the worst performing sector.
Expectation: Sideways
It was a choppy session with some indecision from open to close on which direction the indexes wanted to move. In the end, investors ignored bleak unemployment data and ended the day with gains, albeit very concentrated in specific sectors.
The Nasdaq ended with a +0.55% gain on higher volume. However the 9% body shows the indecision from open to close. The index dipped to create a long lower wick, then made new all-time highs before closing just above the open. The closing range of 72% and the higher high and higher low, makes for a slightly bullish candle. More stocks declined than advanced.
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Friday, January 22, 2021
Facts: +0.09%, Volume lower, Closing range: 77%, Body: 66%
Good: Higher high and higher low, tested but stayed above low
Bad: Pullback in last hour created upper wick
Highs/Lows: Higher high, higher low
Candle: Thick green body under a longer upper wick than lower wick
Advance/Decline: 1.54, about three advancing for every one declining stock
Indexes: SPX (-0.30%), DJI (-0.57%), RUT (+1.28%), VIX (+2.77%)
Sectors: Real Estate (XLRE +0.25%), Utilities (XLU +0.14%) and Communications (XLC +0.04%) were the only gaining sectors. Financials (XLF -0.72%) was the bottom sector.
Expectation: Sideways or Higher
Welcome back to the game RUT! It was a mixed session for most of the major indexes. But the Russell 2000 proved there is more room for small-caps to grow. The Nasdaq was also able to end with a small gain for the day after fighting off morning bears and making a new all-time high before dropping back slightly at close.
The Nasdaq ended with a +0.09% gain on lower volume. The closing range was 77% with a thick 66% green body in the candle. The visible upper wick was created near the end of the day as investors took profits and shifted to defensive positions headed into the weekend. About three stocks advanced for every declining stock.
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The Meaning of Life (View on the Week)
As the previous week was full of caution and indecision, this week the market as full of optimism. The gap-up on Wednesday, Inauguration Day, was the biggest statement of the week. Investment poured back into mega-caps with several of the biggest companies rising to new all-time highs after months of sideways consolidation. But small-caps and growth stocks were not left behind. It was a positive week across all the indexes.
The Nasdaq gained +4.19% for the week, leading the major indexes. The S&P 500 (SPX) gained +1.94% and the Dow Jones Industrial (DJI) gained +0.59%. The small-cap Russell 2000 (RUT) gained +2.15%. All of the indexes hit new all-time highs during the week.
The week kicked off with investors moving out of the defensive positions of the previous week and back into riskier sectors. Defensive sectors like Utilities and Real Estate were sold while long-term US Treasury bond yields rose. Riskier corporate bonds were bought up on confidence in the economic recovery.
Wednesday was the pivotal day that would define the rest of the week. Mega-caps came alive with breakouts for Apple, Microsoft and Alphabet. The latter two would reach new all-time highs. Another mega-cap, Netflix would soar after surprising investors with subscription growth and announcing they were on pace for sustainable cash flow positive and would consider stock buy backs.
Thursday and Friday slowed a bit, but still turned in positive gains for the Nasdaq. Friday the Russell 2000 proved that small-caps have more room to grow as well, leading the major indexes for the day. There were some moves back into defensive plays late on Friday as has become typical to close recent weeks.
The index has set a new high for 9 weeks in a row, even on the weeks that ended in a loss. Average closing range continues to be very high with the most recent week closing with a 95% closing range. The volume was the lowest of the last three weeks, but still higher than average volume for the past six months.
Communications ( XLC ) led the week with a big +5.44% gain, but only after a big pullback the week prior. The sector was led by Alphabet ( GOOGL ) and Facebook ( FB ) with +9.55% and +9.21% gains respectively. Those two companies make up 44% of the ETF . Netflix ( NFLX ) also had a huge gain of +13.49% but only represents 5% of the ETF .
Technology ( XLK ) finished the week in second place, also with the mega-caps, Apple ( AAPL ) and Microsoft ( MSFT ) contributing the most to the gains.
Financials ( XLF ) continued to underperform as more financial institutions reported earnings and disappointed investors.
Energy ( XLE ) was the worst performing sector of the week. There is probably some influence from the new administration policies. However, the more immediate impact was from surprise surplus in oil supplies, signaling much lower demand for oil than anticipated.
The only significant pivots during the week were on Wednesday, January 20th which was inauguration day. That day saw a spike in Communications, Technology and Real Estate ( XLRE ).
The pivot for Communications and Technology were likely reinvestment into mega-caps that didn't seem to be in the crosshairs of any new policies, alleviating some fears of policies that would hurt big tech.
The Real Estate pivot was driven by the additional assistance for renters proposed in the new stimulus package. The stimulus approved in December only covered the estimated amount of back rent owed, but the new stimulus package would extend rental assistance into the future.
US 10y and 20y Treasury Bond yields rose for the week and continue an uptrend from a July 2020 dip. The US 2y Treasury Bond yield dropped, widening the yield spread between long term and short term bonds.
High Yield Corporate Bonds (HYG) prices advanced for the week while Investment Grade Bond (LQD) prices dropped. That indicates a move from safer investments to riskier investments, although the moves are not very large.
The US Dollar (DXY) declined -0.54% for the week.
The put/call ratio (PCCE) ended the week at 0.517, an low value that shows overly bullish optimism among traders. 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.
The CNN Fear & Greed index is also increasing toward the Greed side, but not within the Extreme Greed range yet.
Probably the most alarming of the contrarian sentiment indicators is the NAAIM Exposure Index which is at 112.93. This is the highest leveraged exposure among money managers since December 2017. The exposure tends to be cyclical in that when it reaches above 100, it often marks the beginning of a dip in market prices and likewise in the NAAIM Exposure index. However, November and December provided a unique moment in the index history as the exposure remained above 100 for five weeks in a row.
Silver (SILVER) was up -2.98% and Gold (GOLD) was up +1.49% for the week.
Crude Oil futures were up +0.26%.
Timber (WOOD) was up +3.091%. Copper (COPPER!1) was even at -0.01% while Aluminum (ALI1!) gained +1.03%.
One of the questions coming into this week was when would the biggest four mega-caps join the market rally. They answered big on Wednesday with breakouts among Apple, Microsoft and Alphabet. Amazon still has a bit to go before confirming the breakout, but also had a big move. All are now trading above key moving average lines. Still, a little more volume will help confirm these moves.
Earnings releases will start in the next week and could provide that additional boost. Or they could send investors running. MSFT on 1/26, AAPL on 1/27, AMZN on 1/30 and GOOGL on 2/2.
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The Week Ahead
Consumer Confidence numbers for January will be updated on Tuesday. Core Durable Good Orders for December will be released on Wednesday. The data provides insight into manufacturing activity which has been at its highest level in 14 years.
Probably the most important economic news for the week will come on Wednesday afternoon when the Federal Open Market Committee makes a statement and the Fed announces any decisions on Interest Rate changes.
GDP data for Q4 of 2020 will be released on Thursday before market open. Initial Jobless Claims will also be updated.
Friday will bring more employment data, and several inflation related metrics including PCE consumer price indexes and near and long term inflation expectations.
This week will put us at the height of the earnings season with several significant companies making earnings announcements. Microsoft (MSFT), Johnson & Johnson (JNJ), Starbucks (SBUX), AMD (AMD), American Express (AXP), Dr Horton (DHI) are several of the big releases on Tuesday. Wednesday will bring reports from Apple (AAPL), Tesla (TSLA), Boeing (BA), Facebook (FB). Thursday won't provide any rest as Visa (V), Mastercard 9MA), McDonald's (MCD), Atlassian (TEAM), Western Digital (WDC), American Airlines (AAL). Friday will end the week with reports from Eli Lilly (LLY), Chevron (CVX) and Honeywell (HON).
No doubt I've missed some of your favorites as I can't list them all here. Make sure you know when the earnings dates are for the companies in your portfolio. Then act according to your plan whether you hold thru earnings or reduce positions.
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The Bullish Side
The market made a big statement on Wednesday as the US transitioned to a new administration and a government dominated by the Democrats. The gains signaled investor confidence in the economic recovery and optimism for more stability in markets less impacted by turmoil in politics.
The largest mega-caps, which have not participated fully in the rally since early November, finally broke out of consolidation patterns. The mega-caps influence not only the major indexes, sector indexes, but also have influence over investor sentiment.
The $1.9 trillion dollar stimulus proposed by the Biden administration brings more strength to the recovering economy. The plan will reduce further negative impacts on employment and relieve worries from the unemployed that they might lose their homes. The stimulus checks have added to a record amount of household savings since the pandemic began. Those savings have yet to be unleashed by nervous consumers back into the economy.
While still requiring an extraordinary amount of coordination across the public and private sector, we finally have a plan for mass vaccination in the US that puts the end of the pandemic insight. Pandemic news is one of the remaining sources of big market reactions over the past few months.
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The Bearish Side
Investor sentiment is at a very bullish level which should bring caution to the smart investor. The NAAIM exposure index shows a high level of leverage among money managers. At that high level, it only has one direction to go which is down. Money manager can reduce leverage if more money flows into the market, but more likely it will be lowered by reducing position sizes.
The surprise surge in Oil inventories this past week show that the pandemic is still having a big impact on many sectors from leisure to travel and transportation. Yet the surge in oil inventories has not meant a reduction in prices for consumers or industries depending on shipping and transportation of goods.
That brings us to inflation. The fed has been very specific about its goals for higher inflation and there are signs now that their fiscal programs are starting to get the desired result. The US Dollar value remains low while commodity prices rise. As consumers begin to unleash the record savings into new purchases, demand will outpace supply quickly and raise prices.
Some inflation could be bullish if it also impacts employment and wages, but there is more likely a cycle in which employment and wages stay lower while inflation moves prices higher. Additionally, at some point the Fed will have to decide inflation is high enough and take actions to control it. Those actions will likely be met with a negative response from investors, even if temporary.
None of this would play out within the next week, but are things to keep an eye on as we keep the bearish side in mind.
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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:
The high of Friday at 13,567.14. Can the index continue to make newer highs each week?
Thursday and Friday both fell short of breaking thru 13,600. That would be the next level to watch.
On the downside, there are several key levels to raise caution flags:
The low of last week is 13,078.70. Stay above that line to set a higher low next week.
13,045.66 is the 21d EMA. That is 3.65% below Friday's close. It would be nice for that line to catch up a bit before its tested. If the index dips below, it would be a concern.
13,000 is an area of support.
12,558.09 is the 50d moving average. The 50d moving average is key support line that has not been tested since 11/4.
The 200d MA moved above the lows of October and is now about 20% below the index at 10,913.59.
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Wrap-up
After a week of optimistic gains in the market, it wouldn't be bad for some pause and sideways movement or even a small pullback next week. That would give the key moving average lines, which provide areas of support, some time to move up closer to the indexes. It would also allow a tapering off of the overly bullish sentiment in less dramatic way than a small or large correction.
Overall, the market continues its bullish rally with a higher high and a lower low this week. The indicators are just indicators and don't drive the market. While some caution is necessary, there are many reasons to be confident in the market in the short term.
Good luck, stay healthy and trade safe!
