Market Week In Review - 3/1/2021 - 3/5/2021
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, March 1, 2021
Facts: +3.01%, Volume lower, Closing range: 97%, Body: 78%
Good: Strong buying throughout day, close above 21d EMA
Bad: Nothing
Highs/Lows: Higher high, higher low
Candle: Thick green body with short upper/lower wicks, slightly longer lower wick
Advance/Decline: More than three advancing stocks for every declining stock
Indexes: SPX (+2.38%), DJI (+1.95%), RUT (+3.37%), VIX (-16.46%)
Sectors: Technology (XLK +3.22%) and Financials (XLF +3.13%) were top. Consumer Staples (XLP +1.01%) and Real Estate (XLRE +0.11%) were bottom.
Expectation: Higher
Monday kicked off the week with an upside reversal from last week's downtrend. A small gap up was closed early in the session that was dominated by buying the rest of the day. The gains were large and broad across the market as manufacturing data released in the morning was better than expected.
The Nasdaq closed the day with a +3.01% gain. Volume was lower than Friday. The closing range of 97% represented the buying that continued into close after gains throughout the day created a 78% green body. More than three stocks gained for every declining stock.
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Tuesday, March 2, 2021
Facts: -1.69%, Volume lower, Closing range: 3%, Body: 97%
Good: Stayed above 50d MA
Bad: All red body, no visible upper/lower wicks, back below 21d EMA
Highs/Lows: Higher high, lower low
Candle: Marubozu black candle with no wicks, all red body, outside day
Advance/Decline: More than three declining stocks for every advancing stock
Indexes: SPX (-0.81%), DJI (-0.46%), RUT (-1.93%), VIX (+3.21%)
Sectors: Materials (XLB +0.56%) only gaining sector. Consumer Discretionary (XLY -1.15%) and Technology (XLK -1.59%) were bottom.
Expectation: Sideways or Lower
The market gave up half of yesterday's gains in a continuation of two weeks of choppiness as investors await a stimulus bill that will have both positive and negative impacts on equities. Today's expectation breaker after yesterday's session requires a deeper look to understand. Investment has been rotating in and out of Consumer Discretionary and Technology for the past two weeks.
The Nasdaq closed the day with a -1.69% decline on lower volume. The 97% red body with no visible upper and lower wick forms a Marubozu (shaven head) candlestick. The 3% of lower wick was formed in just the last few minutes of trading as most of the day was dominated by selling. There were three declining stocks for every advancing stock.
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Wednesday, March 3, 2021
Facts: -2.7%, Volume higher, Closing range: 1%, Body: 90%
Good: 13,000 just barely holding on
Bad: Higher volume selling day shows institutional distribution
Highs/Lows: Lower high, lower low
Candle: Tiny upper wick created at open, thick red body with no lower wick
Advance/Decline: More than two declining stocks for every advancing stock
Indexes: SPX (-1.31%), DJI (-0.39%), RUT (-1.06%), VIX (+10.66%)
Sectors: Energy (XLE +1.47%) and Financials (XLF +0.78%) were the top sectors. Consumer Discretionary (XLY -2.35%) and Technology (XLK -2.52%) were bottom.
Expectation: Sideways or Lower
The market continued its retreat on Wednesday with another session of selling that was shared broadly across the indexes. Only a few cyclical sectors were able to hang onto gains for the day as investors moved from high priced big tech and consumer discretionary stocks to recovery stocks expected to benefit from the economic recovery.
The Nasdaq closed the day with a -2.70% loss on higher volume, marking a clear distribution day for the index. For a second day in a row, the index sold off for most of the day, producing a thick red body with no visible lower wick. The closing range was 1% and the red body covers 90% of the candle. Over two stocks declined for every advancing stock.
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Thursday, March 4, 2021
Facts: -2.11%, Volume higher, Closing range: 33%, Body: 45%
Good: Support at 12,550 area
Bad: Rejected at 13,000, new low for year
Highs/Lows: Lower high, lower low
Candle: Red body in center of candle with upper and lower wicks from choppy session
Advance/Decline: Over seven declining stocks for every advancing stock
Indexes: SPX (-1.34%), DJI (-1.11%), RUT (-2.76%), VIX (+7.12%)
Sectors: Energy (XLE +2.39%) was the only sector with gains. Consumer Discretionary (XLY -2.12%) and Technology (XLK -2.21%) were bottom.
Expectation: Lower
The sky is not falling. But the market is! It can be confusing to see the news of reopening of economies around the US and world, positive signs of economic recovery, and yet to have the market be correcting at the same time. Thursday continued the market slide, caused by investor's fears that the economy will recover too fast and inflation will take off beyond the desired 2% that the fed targets, impacting negatively the valuations of mega-caps and growth stocks.
The Nasdaq closed down another -2.11% on much more volume than the previous two sessions. The closing range was a little better at 33%, but still not great. The 45% red body sits in the middle of the candle with an upper wick created by a morning rally to 13,000 and a lower wick created by the afternoon dip to 12,550. The support at 12,550 was expected, but may be temporary. There were over seven declining stocks for every advancing stock.
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Friday, March 5, 2021
Facts: +1.55%, Volume lower, Closing range: 96%, Body: 11%
Good: Morning selling turned into afternoon buying, high closing range
Bad: Shrinking volume into afternoon, lower high, lower low
Highs/Lows: Lower high, lower low
Candle: The long lower wick shows the morning selling was bought back for a rally into afternoon
Advance/Decline: About three advancing stocks for every two declining stocks
Indexes: SPX (+1.95%), DJI (+1.85%), RUT (+2.11%), VIX (-13.69%)
Sectors: Energy (XLE +3.74%) and Industrials (XLI +2.37%) were the top sectors. Real Estate (XLRE +1.15%) and Consumer Discretionary (XLY +0.64%) were bottom.
Expectation: Sideways or Higher
The week ended with some positive market gains to take into the weekend. It's a start, but there are still several tests for the indexes to pass and prove investors are here to stay and rally next week.
The Nasdaq closed the day with a +1.55% on slightly lower volume than the previous day, but higher than average. The closing range was a high 96% with a thin body of 11% that rests above a very long lower wick. There were three advancing stocks for every two declining stocks.
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The Meaning of Life (View on the Week)
There is a lot to look at in reviewing this past week's market. An outsized rotation among sectors presented itself as a correction in the Nasdaq. The rotation pulled the index down 10% from all-time highs, the level typically viewed as correction in a market. If you kept your eyes only on the Nasdaq, you might have missed that eight out of the eleven sectors defined by the SPDR ETFs ended the week with positive gains. Several sectors never dipped into the negative.
The question on my mind and many investors' minds is where does it go from here. Of course, the market will always do what the market wants to do. But we can pick apart some of the signals we have in front of us and build some expectations for the coming week. From those expectations, I build a game plan to make sure I'm protected from further loss but also don't miss a potential huge buying opportunity.
Monday started the week with a huge positive gain coming off the tough previous week. Stimulus progress over the weekend and some easing of concerns over inflation brought the buyers back into tech stocks. Things looked good and I set an expectation for higher on Tuesday.
That expectation was busted over the next three days. Tuesday's candle set off alarms with no upper and lower wick; just a tick red body. A short-lived rally midday couldn't fend off the bears as the index moved back toward the 50d moving average line. Wednesday continued to sell, but still closed above the 13,000 support area that held several times since the beginning of the year. That area also marked a neck line in a head and shoulders pattern on the chart. Thursday broke the neck line and sent the index back to 12,500 area and erasing the year to date gains.
That brings us to Friday. The day was confusing to me. Much of the media claimed victory for the markets as a result of better than expected employment data. That data came at 8:30 in the morning, but the market opened with high volume distribution that didn't stop until 11:30. For the Nasdaq, the selling stopped right at 12,400 and the rest of the day was accumulation, but at much lower volume. It was very similar to the intraday pattern on 2/23 which was followed by a low volume accumulation day on 2/24. 2/25 brought the worst distribution day since September.
The Nasdaq closed the week down -2.06% on higher volume. It's the third week in a row of distribution for the tech heavy index. The closing range for the week was 43%. That's not too bad for closing range and reflects the bounce on Friday that brought the other major indexes back to positive closes for the week.
The glaring characteristic on the weekly chart is the breakdown of the channel drawn from the March bottom. However, if you rewind the chart to the week of October 26th, the lower line of the channel drawn at that point was also violated (causing us to redraw the current channel). The following week was a 9% gain.
The S&P 500 (SPX) advanced +0.81%. The Dow Jones Industrial average (DJI) gained 1.82%. The Russell 2000 (RUT) lost -0.40% for the week.
The VIX volatility index closed the week with a -11.77% decline.
If you kept your eyes only on big tech and growth stocks, you might have missed that many sectors had fairly good advances this week. The sector chart supports the thesis that there is an outsized rotation in progress that is presenting as a correction, but that there is still a level of support in the broader equities market.
The top two sectors, Energy ( XLE ) and Financials ( XLF ), never dipped into negative territory even with Thursday's broad sell-off.
The other cyclical Industrials ( XLI ) and Materials ( XLB ) also performed well for the week. Materials was leading for the week at the end of Tuesday, but backed off a bit later in the week.
There was caution visible in the sectors as Utilities ( XLU ) and Consumer Staples ( XLP ) advanced. These are safe bet sectors during corrections.
Investors moved from sectors that are more exposed to pressures from inflation and higher yields. Consumer Discretionary ( XLY ) and Technology ( XLK ) were the hardest hit among the sectors. Real Estate ( XLRE ) is also at the bottom of the list.
At center stage is the bond market sell-off that is driving higher yields. Interest rates that are based on the yields will make borrowing costs higher. Add to that fears of higher inflation would bring interest rate adjustments earlier than initially expected. The higher interest rates benefit big banks that drive the Financials sector higher. But it depresses the future value that was priced into high growth sectors like Technology.
US 30y and 10y Treasury Bond yields continued to rise and widen the gap with shorter term treasury bonds. In addition the shorter term bonds, including the 2y, are experiencing a higher than usual level of volatility. That volatility makes them less useful as a hedge for investors, causing further selling and higher yields. Yields go up when bond prices go down.
High Yields Corporate Bonds (HYG) actually increased a bit after last week's dip. Investment Grade (LQD) corporate bond prices continued to decline.
The US Dollar (DXY) advanced +1.21% for the week.
The strengthening dollar comes at the expense of currencies that were doing well earlier in the pandemic cycle including the Australian Dollar and Swiss Franc. Those countries were seen as recovering faster than the United States. As the US economy picks up momentum, the US dollar will continue to strengthen.
Silver (SILVER) and Gold (GOLD) both declined for another week.
Crude Oil Futures (CRUDEOIL1!) had another week of gains as OPEC decided to not increase production.
Timber (WOOD) advanced for the week. Copper (COPPER1!) declined while Aluminum (ALI1!) gained for the week.
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The Big Four Mega-caps
The four big mega-caps all had very different performance this week. Alphabet (GOOGL) did very well, gaining +3.72% for the week. Apple (AAPL) had a small gain, but still trades well below its 10w moving average. Microsoft (MSFT) had a -0.34% loss, but was able to close the week above the 10w moving average line. Amazon (AMZN) continued to move lower with a -2.99% and a close below the 40w moving average.
The recovery stocks I featured last week, with the exception of Exxon Mobil, had losses for the week. However, they are all trading above key moving average lines and still in upward trends. Exxon Mobil has almost doubled in price since November. That milestone could happen this week.
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Looking Deeper at the Rebound
I want to take a deeper look at Friday's rebound after the morning dip. The timing didn't make much sense as I couldn't find any discernable catalyst to reverse the morning selling. The reverse happened around 11:30, two hours after the positive employment data hit the market. The reversal was also at a very odd round 12,400 for the Nasdaq.
The below chart is the intraday 15m chart and the thing that sticks out is the contrast of volume in the morning selling vs the volume as investors came in to buy the dip. This would indicate that larger institutions were distributing in the morning, but a smaller number of investors were accumulating in the afternoon. In fact, the Volume Weighted Average Price for the day did not regain positive territory.
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Growth vs Value
I've shared growth vs value charts in the past that show the amazing parabolic difference between growth stocks and value stocks, especially in 2020 after the pandemic. February saw a dramatic dip in the chart as investors are moving from growth to value. That move started even before the scare around inflation and higher bond yields.
Even if the volatility in bonds gets under control, there is still going to be plenty of rotation in the system until value stocks have a chance to catch up a bit with growth stocks. That rotation is likely to continue putting pressure on the Nasdaq that carries a high percentage of high tech and growth stocks.
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Investor Sentiment
The put/call ratio (PCCE) ended the week at 0.816, with investors still showing balance of bullish and bearish sentiment. 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. It hit a low of 0.503 two weeks ago leading into this correction.
The CNN Fear & Greed index moved is neutral.
Money managers are at a 65 leveraged level as measured by the NAAIM Exposure Index. That's down from being over 100 a few weeks ago.
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The Week Ahead
The big news for Monday has already happened. The stimulus bill passed in the Senate along party lines and now moves to the House where it's expected to pass. The vote is scheduled for Tuesday.
Otherwise, there is not much other economic news planned for Monday.
The EIA Short-Term energy outlook will be released before market opens on Tuesday. After market close, the API Weekly Crude Oil stock numbers will be released. The house will vote on the stimulus bill on Tuesday.
Another look at inflation will come on Wednesday with the release of consumer price index data in the morning. Crude Oil Inventories data will come after the market opens. Maybe one of the most significant economic events for the week will be the 10y Note Auction at 1pm.
Thursday will bring an update to Initial Jobless Claims and the JOLTs Job Openings report. Both are expected to improve over previous numbers.
Friday's producer price index data will complement the consumer price data earlier in the week. In addition, the inflation expectation and consumer sentiment numbers released after the market opens will be watched closely.
Earnings reports will again be dominated by smaller cap companies.
Earnings reports on Monday will include Livongo (LVGO), Niu Tech (NIU), Gohealth (GOCO).
On Tuesday, MongoDb (MDB) and Open Lending (LPRO) will report.
Oracle (ORCL) will report on Wednesday. Joining Oracle, will be Campbell Soup (CPB), Cloudera (CLDR) and Sumo Logic (SUMO).
JD.com (JD) is the big mega-cap reporting on Thursday before market opens. DocuSign (DOCU) and Celsius (CELH) will also report Thursday.
Shard (SHCAY) will report earnings on Friday before market open.
Be sure to check for scheduled earnings reports for stocks in your own portfolio.
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The Bullish Side
Should we start, or end with the $1.9 trillion stimulus bill. Or both. It's a near certainty that the bill will pass through the house this week with the vote scheduled for Tuesday. The bill will include stimulus checks to be paid out based on household size and income. Additional money will be put toward vaccinations and testing. There is aid for state and local governments facing higher costs and lower tax revenue. Critical infrastructure projects, including broadband internet, were added to the bill this week. There is a plethora of other protections for families struggling in the pandemic with unemployment, rent and health insurance. Airlines, Airports and Small Businesses will get extra support.
All of that could be a catalyst to more spending by consumers. In addition to the stimulus checks going toward new purchases, there is a record amount of consumer savings accumulated during the pandemic. Debt is at all-time lows. As the lockdowns are lifted, consumers will want to get out and spend money, especially on long-overdue vacations.
Despite the distribution on the Nasdaq, the S&P 500 and the Dow Jones Industrial average had good weeks. The number of sectors that ended the week with gains supports the thesis that an oversized rotation from growth stocks to value stocks has presented itself as a correction, but underneath the charts is still broad support for the equities markets among investors.
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The Bearish Side
The shock in the bond markets and impact on equities is far from over. As the dollar gains strength and consumer spending picks up after the stimulus, there will certainly be more pressure on bond prices, sending yields even higher. That will not only impact the cost of servicing debt in high growth companies, but will increase adjustable mortgage payments based on the bond yields.
With the increased consumer spending expected after the stimulus, inflation will be closely watched by investors. If the economy overheats, the fed will be forced to rethink monetary policy. When that happens we could find ourselves in another 'taper tantrum'. The term was given to the surprise on May 22, 2013 when investors found the fed would reduce bond purchasing. Yields rose as bond prices dipped and small pull back occurred in equity markets over the next few weeks. Only this time around, the impact is likely to be much bigger to match the unprecedented amount of quantitative easing being used to prop the economy.
The rebound in prices on Friday was a welcome change. However, the volume profile throughout the day gives the appearance that big institutions were distributing. The accumulation in the afternoon came with much smaller volume as possibly investors were buying the dip. Those kind of weak gains don't last long.
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Key Nasdaq Levels to Watch
The index has several tests to pass this week to build confidence in a rally attempt.
First on the positive side:
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, March 1, 2021
Facts: +3.01%, Volume lower, Closing range: 97%, Body: 78%
Good: Strong buying throughout day, close above 21d EMA
Bad: Nothing
Highs/Lows: Higher high, higher low
Candle: Thick green body with short upper/lower wicks, slightly longer lower wick
Advance/Decline: More than three advancing stocks for every declining stock
Indexes: SPX (+2.38%), DJI (+1.95%), RUT (+3.37%), VIX (-16.46%)
Sectors: Technology (XLK +3.22%) and Financials (XLF +3.13%) were top. Consumer Staples (XLP +1.01%) and Real Estate (XLRE +0.11%) were bottom.
Expectation: Higher
Monday kicked off the week with an upside reversal from last week's downtrend. A small gap up was closed early in the session that was dominated by buying the rest of the day. The gains were large and broad across the market as manufacturing data released in the morning was better than expected.
The Nasdaq closed the day with a +3.01% gain. Volume was lower than Friday. The closing range of 97% represented the buying that continued into close after gains throughout the day created a 78% green body. More than three stocks gained for every declining stock.
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Tuesday, March 2, 2021
Facts: -1.69%, Volume lower, Closing range: 3%, Body: 97%
Good: Stayed above 50d MA
Bad: All red body, no visible upper/lower wicks, back below 21d EMA
Highs/Lows: Higher high, lower low
Candle: Marubozu black candle with no wicks, all red body, outside day
Advance/Decline: More than three declining stocks for every advancing stock
Indexes: SPX (-0.81%), DJI (-0.46%), RUT (-1.93%), VIX (+3.21%)
Sectors: Materials (XLB +0.56%) only gaining sector. Consumer Discretionary (XLY -1.15%) and Technology (XLK -1.59%) were bottom.
Expectation: Sideways or Lower
The market gave up half of yesterday's gains in a continuation of two weeks of choppiness as investors await a stimulus bill that will have both positive and negative impacts on equities. Today's expectation breaker after yesterday's session requires a deeper look to understand. Investment has been rotating in and out of Consumer Discretionary and Technology for the past two weeks.
The Nasdaq closed the day with a -1.69% decline on lower volume. The 97% red body with no visible upper and lower wick forms a Marubozu (shaven head) candlestick. The 3% of lower wick was formed in just the last few minutes of trading as most of the day was dominated by selling. There were three declining stocks for every advancing stock.
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Wednesday, March 3, 2021
Facts: -2.7%, Volume higher, Closing range: 1%, Body: 90%
Good: 13,000 just barely holding on
Bad: Higher volume selling day shows institutional distribution
Highs/Lows: Lower high, lower low
Candle: Tiny upper wick created at open, thick red body with no lower wick
Advance/Decline: More than two declining stocks for every advancing stock
Indexes: SPX (-1.31%), DJI (-0.39%), RUT (-1.06%), VIX (+10.66%)
Sectors: Energy (XLE +1.47%) and Financials (XLF +0.78%) were the top sectors. Consumer Discretionary (XLY -2.35%) and Technology (XLK -2.52%) were bottom.
Expectation: Sideways or Lower
The market continued its retreat on Wednesday with another session of selling that was shared broadly across the indexes. Only a few cyclical sectors were able to hang onto gains for the day as investors moved from high priced big tech and consumer discretionary stocks to recovery stocks expected to benefit from the economic recovery.
The Nasdaq closed the day with a -2.70% loss on higher volume, marking a clear distribution day for the index. For a second day in a row, the index sold off for most of the day, producing a thick red body with no visible lower wick. The closing range was 1% and the red body covers 90% of the candle. Over two stocks declined for every advancing stock.
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Thursday, March 4, 2021
Facts: -2.11%, Volume higher, Closing range: 33%, Body: 45%
Good: Support at 12,550 area
Bad: Rejected at 13,000, new low for year
Highs/Lows: Lower high, lower low
Candle: Red body in center of candle with upper and lower wicks from choppy session
Advance/Decline: Over seven declining stocks for every advancing stock
Indexes: SPX (-1.34%), DJI (-1.11%), RUT (-2.76%), VIX (+7.12%)
Sectors: Energy (XLE +2.39%) was the only sector with gains. Consumer Discretionary (XLY -2.12%) and Technology (XLK -2.21%) were bottom.
Expectation: Lower
The sky is not falling. But the market is! It can be confusing to see the news of reopening of economies around the US and world, positive signs of economic recovery, and yet to have the market be correcting at the same time. Thursday continued the market slide, caused by investor's fears that the economy will recover too fast and inflation will take off beyond the desired 2% that the fed targets, impacting negatively the valuations of mega-caps and growth stocks.
The Nasdaq closed down another -2.11% on much more volume than the previous two sessions. The closing range was a little better at 33%, but still not great. The 45% red body sits in the middle of the candle with an upper wick created by a morning rally to 13,000 and a lower wick created by the afternoon dip to 12,550. The support at 12,550 was expected, but may be temporary. There were over seven declining stocks for every advancing stock.
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Friday, March 5, 2021
Facts: +1.55%, Volume lower, Closing range: 96%, Body: 11%
Good: Morning selling turned into afternoon buying, high closing range
Bad: Shrinking volume into afternoon, lower high, lower low
Highs/Lows: Lower high, lower low
Candle: The long lower wick shows the morning selling was bought back for a rally into afternoon
Advance/Decline: About three advancing stocks for every two declining stocks
Indexes: SPX (+1.95%), DJI (+1.85%), RUT (+2.11%), VIX (-13.69%)
Sectors: Energy (XLE +3.74%) and Industrials (XLI +2.37%) were the top sectors. Real Estate (XLRE +1.15%) and Consumer Discretionary (XLY +0.64%) were bottom.
Expectation: Sideways or Higher
The week ended with some positive market gains to take into the weekend. It's a start, but there are still several tests for the indexes to pass and prove investors are here to stay and rally next week.
The Nasdaq closed the day with a +1.55% on slightly lower volume than the previous day, but higher than average. The closing range was a high 96% with a thin body of 11% that rests above a very long lower wick. There were three advancing stocks for every two declining stocks.
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The Meaning of Life (View on the Week)
There is a lot to look at in reviewing this past week's market. An outsized rotation among sectors presented itself as a correction in the Nasdaq. The rotation pulled the index down 10% from all-time highs, the level typically viewed as correction in a market. If you kept your eyes only on the Nasdaq, you might have missed that eight out of the eleven sectors defined by the SPDR ETFs ended the week with positive gains. Several sectors never dipped into the negative.
The question on my mind and many investors' minds is where does it go from here. Of course, the market will always do what the market wants to do. But we can pick apart some of the signals we have in front of us and build some expectations for the coming week. From those expectations, I build a game plan to make sure I'm protected from further loss but also don't miss a potential huge buying opportunity.
Monday started the week with a huge positive gain coming off the tough previous week. Stimulus progress over the weekend and some easing of concerns over inflation brought the buyers back into tech stocks. Things looked good and I set an expectation for higher on Tuesday.
That expectation was busted over the next three days. Tuesday's candle set off alarms with no upper and lower wick; just a tick red body. A short-lived rally midday couldn't fend off the bears as the index moved back toward the 50d moving average line. Wednesday continued to sell, but still closed above the 13,000 support area that held several times since the beginning of the year. That area also marked a neck line in a head and shoulders pattern on the chart. Thursday broke the neck line and sent the index back to 12,500 area and erasing the year to date gains.
That brings us to Friday. The day was confusing to me. Much of the media claimed victory for the markets as a result of better than expected employment data. That data came at 8:30 in the morning, but the market opened with high volume distribution that didn't stop until 11:30. For the Nasdaq, the selling stopped right at 12,400 and the rest of the day was accumulation, but at much lower volume. It was very similar to the intraday pattern on 2/23 which was followed by a low volume accumulation day on 2/24. 2/25 brought the worst distribution day since September.
The Nasdaq closed the week down -2.06% on higher volume. It's the third week in a row of distribution for the tech heavy index. The closing range for the week was 43%. That's not too bad for closing range and reflects the bounce on Friday that brought the other major indexes back to positive closes for the week.
The glaring characteristic on the weekly chart is the breakdown of the channel drawn from the March bottom. However, if you rewind the chart to the week of October 26th, the lower line of the channel drawn at that point was also violated (causing us to redraw the current channel). The following week was a 9% gain.
The S&P 500 (SPX) advanced +0.81%. The Dow Jones Industrial average (DJI) gained 1.82%. The Russell 2000 (RUT) lost -0.40% for the week.
The VIX volatility index closed the week with a -11.77% decline.
If you kept your eyes only on big tech and growth stocks, you might have missed that many sectors had fairly good advances this week. The sector chart supports the thesis that there is an outsized rotation in progress that is presenting as a correction, but that there is still a level of support in the broader equities market.
The top two sectors, Energy ( XLE ) and Financials ( XLF ), never dipped into negative territory even with Thursday's broad sell-off.
The other cyclical Industrials ( XLI ) and Materials ( XLB ) also performed well for the week. Materials was leading for the week at the end of Tuesday, but backed off a bit later in the week.
There was caution visible in the sectors as Utilities ( XLU ) and Consumer Staples ( XLP ) advanced. These are safe bet sectors during corrections.
Investors moved from sectors that are more exposed to pressures from inflation and higher yields. Consumer Discretionary ( XLY ) and Technology ( XLK ) were the hardest hit among the sectors. Real Estate ( XLRE ) is also at the bottom of the list.
At center stage is the bond market sell-off that is driving higher yields. Interest rates that are based on the yields will make borrowing costs higher. Add to that fears of higher inflation would bring interest rate adjustments earlier than initially expected. The higher interest rates benefit big banks that drive the Financials sector higher. But it depresses the future value that was priced into high growth sectors like Technology.
US 30y and 10y Treasury Bond yields continued to rise and widen the gap with shorter term treasury bonds. In addition the shorter term bonds, including the 2y, are experiencing a higher than usual level of volatility. That volatility makes them less useful as a hedge for investors, causing further selling and higher yields. Yields go up when bond prices go down.
High Yields Corporate Bonds (HYG) actually increased a bit after last week's dip. Investment Grade (LQD) corporate bond prices continued to decline.
The US Dollar (DXY) advanced +1.21% for the week.
The strengthening dollar comes at the expense of currencies that were doing well earlier in the pandemic cycle including the Australian Dollar and Swiss Franc. Those countries were seen as recovering faster than the United States. As the US economy picks up momentum, the US dollar will continue to strengthen.
Silver (SILVER) and Gold (GOLD) both declined for another week.
Crude Oil Futures (CRUDEOIL1!) had another week of gains as OPEC decided to not increase production.
Timber (WOOD) advanced for the week. Copper (COPPER1!) declined while Aluminum (ALI1!) gained for the week.
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The Big Four Mega-caps
The four big mega-caps all had very different performance this week. Alphabet (GOOGL) did very well, gaining +3.72% for the week. Apple (AAPL) had a small gain, but still trades well below its 10w moving average. Microsoft (MSFT) had a -0.34% loss, but was able to close the week above the 10w moving average line. Amazon (AMZN) continued to move lower with a -2.99% and a close below the 40w moving average.
The recovery stocks I featured last week, with the exception of Exxon Mobil, had losses for the week. However, they are all trading above key moving average lines and still in upward trends. Exxon Mobil has almost doubled in price since November. That milestone could happen this week.
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Looking Deeper at the Rebound
I want to take a deeper look at Friday's rebound after the morning dip. The timing didn't make much sense as I couldn't find any discernable catalyst to reverse the morning selling. The reverse happened around 11:30, two hours after the positive employment data hit the market. The reversal was also at a very odd round 12,400 for the Nasdaq.
The below chart is the intraday 15m chart and the thing that sticks out is the contrast of volume in the morning selling vs the volume as investors came in to buy the dip. This would indicate that larger institutions were distributing in the morning, but a smaller number of investors were accumulating in the afternoon. In fact, the Volume Weighted Average Price for the day did not regain positive territory.
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Growth vs Value
I've shared growth vs value charts in the past that show the amazing parabolic difference between growth stocks and value stocks, especially in 2020 after the pandemic. February saw a dramatic dip in the chart as investors are moving from growth to value. That move started even before the scare around inflation and higher bond yields.
Even if the volatility in bonds gets under control, there is still going to be plenty of rotation in the system until value stocks have a chance to catch up a bit with growth stocks. That rotation is likely to continue putting pressure on the Nasdaq that carries a high percentage of high tech and growth stocks.
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Investor Sentiment
The put/call ratio (PCCE) ended the week at 0.816, with investors still showing balance of bullish and bearish sentiment. 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. It hit a low of 0.503 two weeks ago leading into this correction.
The CNN Fear & Greed index moved is neutral.
Money managers are at a 65 leveraged level as measured by the NAAIM Exposure Index. That's down from being over 100 a few weeks ago.
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The Week Ahead
The big news for Monday has already happened. The stimulus bill passed in the Senate along party lines and now moves to the House where it's expected to pass. The vote is scheduled for Tuesday.
Otherwise, there is not much other economic news planned for Monday.
The EIA Short-Term energy outlook will be released before market opens on Tuesday. After market close, the API Weekly Crude Oil stock numbers will be released. The house will vote on the stimulus bill on Tuesday.
Another look at inflation will come on Wednesday with the release of consumer price index data in the morning. Crude Oil Inventories data will come after the market opens. Maybe one of the most significant economic events for the week will be the 10y Note Auction at 1pm.
Thursday will bring an update to Initial Jobless Claims and the JOLTs Job Openings report. Both are expected to improve over previous numbers.
Friday's producer price index data will complement the consumer price data earlier in the week. In addition, the inflation expectation and consumer sentiment numbers released after the market opens will be watched closely.
Earnings reports will again be dominated by smaller cap companies.
Earnings reports on Monday will include Livongo (LVGO), Niu Tech (NIU), Gohealth (GOCO).
On Tuesday, MongoDb (MDB) and Open Lending (LPRO) will report.
Oracle (ORCL) will report on Wednesday. Joining Oracle, will be Campbell Soup (CPB), Cloudera (CLDR) and Sumo Logic (SUMO).
JD.com (JD) is the big mega-cap reporting on Thursday before market opens. DocuSign (DOCU) and Celsius (CELH) will also report Thursday.
Shard (SHCAY) will report earnings on Friday before market open.
Be sure to check for scheduled earnings reports for stocks in your own portfolio.
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The Bullish Side
Should we start, or end with the $1.9 trillion stimulus bill. Or both. It's a near certainty that the bill will pass through the house this week with the vote scheduled for Tuesday. The bill will include stimulus checks to be paid out based on household size and income. Additional money will be put toward vaccinations and testing. There is aid for state and local governments facing higher costs and lower tax revenue. Critical infrastructure projects, including broadband internet, were added to the bill this week. There is a plethora of other protections for families struggling in the pandemic with unemployment, rent and health insurance. Airlines, Airports and Small Businesses will get extra support.
All of that could be a catalyst to more spending by consumers. In addition to the stimulus checks going toward new purchases, there is a record amount of consumer savings accumulated during the pandemic. Debt is at all-time lows. As the lockdowns are lifted, consumers will want to get out and spend money, especially on long-overdue vacations.
Despite the distribution on the Nasdaq, the S&P 500 and the Dow Jones Industrial average had good weeks. The number of sectors that ended the week with gains supports the thesis that an oversized rotation from growth stocks to value stocks has presented itself as a correction, but underneath the charts is still broad support for the equities markets among investors.
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The Bearish Side
The shock in the bond markets and impact on equities is far from over. As the dollar gains strength and consumer spending picks up after the stimulus, there will certainly be more pressure on bond prices, sending yields even higher. That will not only impact the cost of servicing debt in high growth companies, but will increase adjustable mortgage payments based on the bond yields.
With the increased consumer spending expected after the stimulus, inflation will be closely watched by investors. If the economy overheats, the fed will be forced to rethink monetary policy. When that happens we could find ourselves in another 'taper tantrum'. The term was given to the surprise on May 22, 2013 when investors found the fed would reduce bond purchasing. Yields rose as bond prices dipped and small pull back occurred in equity markets over the next few weeks. Only this time around, the impact is likely to be much bigger to match the unprecedented amount of quantitative easing being used to prop the economy.
The rebound in prices on Friday was a welcome change. However, the volume profile throughout the day gives the appearance that big institutions were distributing. The accumulation in the afternoon came with much smaller volume as possibly investors were buying the dip. Those kind of weak gains don't last long.
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Key Nasdaq Levels to Watch
The index has several tests to pass this week to build confidence in a rally attempt.
First on the positive side:
- First, the index needs to close back above the 13,000 support/resistance area. That area has been the pivot point for several rallies and dips since early December. That would also bring the index back above the neck line of the head and shoulders pattern.
- The next goal will be to close back above the 50d moving average, currently at 13,340.74. Sustaining prices above that line will bring the 10d MA back up above the line also, signaling an uptrend.
- The 21d EMA is approaching a cross under the 50d MA. The index needs to get above 13,390.23 to put the 21d EMA back in an uptrend.
- 13,601.33 is the high of this past week. Make a higher high while also providing a higher low to end the downtrend on the weekly chart.
- 14,000 will be the next area of resistance. The index spent only 5 days above this mark.
- The all-time high is at 13,175.12. That might be a stretch to get there this week, but keep it in our sites.
On the downside, there are several key levels to raise caution flags:- At 12,757.61, the Nasdaq is 10% below the all-time high, a significant level for investors.
- 12,500-12,550 is a support area that held on Thursday before the index broke below it on Friday.
- 12,397.05 is the low of the past week where the index started its upside reversal on Friday.
- Several possible areas of support at 12,550, 12,250, and 12,000.
- The 200d MA is about 10% below the index at 11,622.33.
The Nasdaq moved into "official" correction this week as it dipped more than 10% off all-time highs. But there is more than what appears at the surface in the index chart. The rotation from growth to value and mega-cap to small-cap really started in early August and is now accelerating as the economy begins to show more signs of recovery.
If you've been investing in growth stocks, it's probably been a tough few weeks. Many of those companies will show great performance, but their stock prices may still come down as investors weigh the net present value of those investments vs value stocks that are due to grow in 2021.
Now is a great time to take a look at your watch lists. Trim the stocks that are performing worse than the rest of the market. Add stocks that are doing well relative to the dip in the market.
The correction status remains and it's not a great time to make big bets until the market confirms a rally. But don't check out. Keep an eye on the daily moves and look for a few days of gains on higher volume and regaining a key moving average line like the 21d EMA. Those will be solid signs that investors are accumulating again and risk is lower.
Good luck, stay healthy and trade safe! - At 12,757.61, the Nasdaq is 10% below the all-time high, a significant level for investors.
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