Trend lines drawn from the 10/30 bottom (76d), 2/12 (5d) and today 2/19 (1d).
Ideas always welcome in the comments. Errors will be amended as comments on TradingView or corrected inline in my blog.
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Friday, February 19, 2021
Facts: -2.46%, Volume lower, Closing range: 1%, Body: 80%
Good: Nothing
Bad: Gap down, thick red body, rejected trying to regain the 21d EMA
Highs/Lows: Lower high, lower low
Candle: Mostly red body under a short upper wick, nearly zero lower wick
Advance/Decline: 0.46, 2 declining stocks for every advancing stock
Indexes: SPX (-0.77%), DJI (+0.09%), RUT (-0.69%), VIX (+6.35%)
Sectors: Energy (XLE +3.46%) Financials (XLF +0.39%) were top. Technology (XLK -2.21%), Consumer Discretionary (XLY -2.11%)
Expectation: Lower
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Market Overview
It was a tough day for the Nasdaq, big tech, and growth stocks. On days like this, it is important to take a step back and view things from both sides. Avoid trying to make predictions. In this daily update let's look at what's going on more broadly, set an expectation for the index tomorrow and look for a follow-through or an expectation breaker.
The Nasdaq closed the day with a -2.46% decline. The volume was lower, but the move was decisive with a thick red 80% body and a dismal 1% closing range. The candle's short upper wick and nearly invisible lower wick represent a day where the bears ruled on the Nasdaq. Over two stocks declined for every advancing stocks.
The other major indexes faired a bit better. The Dow Jones Industrial (DJI) ended the day with a gain +0.09% thanks much to Walt Disney (DIS +4.41%) and Exxon Mobil (XOM +3.69%). The S&P 500 (SPX) closed down -0.77%. The Russell 2000 (RUT) declined -0.69%.
The VIX volatility index ended the day with a +6.35% day.
It's clear among the sector list that the market was rotating, not really correcting. That doesn't mean it won't correct. Just that today was not part of a correction. 6 of the 11 SPDR sector ETFs ended the day with gains. 8 of the sectors outperformed the broader SPX index.
The sectors at the top of the list were the cyclicals with Energy (XLE +3.46%) and Financials (XLF +0.93%) as the leading two sectors. At the bottom of the list was Consumer Discretionary (XLY -2.11%) and Technology (XLK -2.21%). But also at the bottom of the list was the defensive sector of Utilities (XLU -1.95%). Investors today were looking to move to sectors with new opportunities for returns, not moving into defensive positions.
Another way to look at this is the ETF Fund Flows. You can check etf.com for this data, and it is delayed by one day so we can't see today. But looking at last week, when the market was also pulling back, the total inflows are greater than outflows. Topping the list of inflows are iShares and Vanguard S&P 500 ETFs. The rest of the list is mostly equity ETFs. At the top of the outflows are corporate bonds and long term treasury bonds.
Put that all together and you can see the big picture thinking of money managers. Indicators of increased inflation is driving investors from treasury bonds. The higher yields on those bonds will drive increase interest rates in borrowing for companies that depend on debt to drive growth. The selling of the treasury bonds then in turn can increase defaults among businesses and so investors are also selling off risky High Yield and less risky Investment Grade corporate bonds.
They are also moving from the equities of those companies and sectors with higher debt to companies and sectors with less dependency on debt. So we see an indiscriminate rotation from big tech and growth stocks to cyclical stocks. The market will eventually price in the higher interest rate impact at a more precise level (stock by stock) and you will see a mellowing out of the reaction for some companies.
And all of this…is because…the economy is recovering! That's a good thing!
-=x=-=x=-=x=-=x=-=x=-=x=-=x=-
Economic Indicators
The US Dollar (DXY) declined -0.29%. Yields on the 30y and 10y treasury bond yields rose while 2y treasury bond yields remained flat. The spread between long term and short term bonds widened again.
Both High Yield (HYG) corporate bonds and Investor Grade (LQD) corporate bonds prices declined. However the spread been corporate bonds and treasury bonds remains about even over the past few weeks.
Silver (SILVER) and Gold (GOLD) both advanced. Crude Oil (CRUDEOIL1!) advanced. Timber (WOOD) was about even. Copper (COPPER1!) and Aluminum (ALI1!) both advanced. Both Copper and Aluminum are in high demand as economic activity returns to normal.
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Investor Sentiment
The put/call ratio declined to 0.557. The put/call ratio (PCCE) is a contrarian indicator that shows overly bullish or overly bearish investor behavior. The 0.7 level is considered normal. As it approaches 0.60 (overly bullish) and below, watch for a possible pullback in the market.
The CNN Fear & Greed index remains near a normal level, slightly on the Greed side.
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Market Leaders
Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOGL) all declined for the day. Apple and Amazon are trading below their 50d moving average. Microsoft moved below its 21d EMA. Alphabet (GOOGL) is still trading above both key moving average lines. Having the big four mega-caps trading below these key indicators will weigh down the index and sentiment for the rest of the market.
Walt Disney and Exxon Mobil were the top mega-caps for the day, helping the Dow Jones Industrial close the day in the positive. There are only 14 mega-caps to close in the positive. Tesla (TSLA) closed down -8.55%, putting the company at the bottom of the mega-cap list for the day.
The daily market update maintains a watch list for Growth Stocks. Exactly zero of them closed in the positive today. Fiverr (FVRR), Enphase (ENPH), UP Fintech (TIGR), Ehang (EH) and Solar Edge (SEDG) all closed with more than a 10% loss for the day.
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Looking ahead
Two big economic events scheduled for tomorrow. The first is the Consumer Confidence numbers for February, to be released at 10am. Fed Chair Jerome Powell is also supposed to begin testifying before congress at that time, which will last several hours.
Earnings reports will start to pick up tomorrow. Reports will come from Square (SQ), Intuit (INTU), Upwork (UPWK), among others. Be sure to check the companies in your portfolio for upcoming earnings reports.
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Trends, Support and Resistance
The index is in the bottom half of the long-term regression trend channel. The trend lines I draw are the mid-point of the channels.
The long-term trend line from the 10/30 bottom points to a +4.39% gain. That seems unlikely, and would need to push past resistance at the 21d EMA and the 14,000 support/resistance area. With five days of downtrend, I may finally remove this trend line and start a new one.
The five-day trend line points to an advance of +0.39%. That seems like a reasonable move in the short-term.
The one-day trend line is pointing to a -0.30% declined
If there is further downside, the 50d MA line offers an area of support and is -2.3% below Monday's close. The 13,000 level also seems to be an area of support. The index held the 12,550 area recently. If it passes that area, the next support area is 12,250.
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Wrap-up
Depending on the shape of your portfolio, you might have had a great day in the market or a terrible day in the market. Looking just at the Nasdaq index, it's enough to make any investor nervous. A gap down and close below a key moving average line.
Take a step back and see what the broader market was doing. Investors were not necessarily exiting equities. Instead they were rotating from companies and sectors that depend on debt for growth and moving to cyclical stocks, especially stocks expected to recover later this year. See Carnival Cruise Lines as an example.
The rotation may not be over. I'm setting an expectation for lower tomorrow based on the chart, but will be watching for an expectation breaker. If it's making you nervous, reduce position sizes in those stocks most exposed. In case a deeper correction does occur, make sure you have stops in place across your portfolio, or be ready to look the other way and ride the dip.
There is reason to be cautious, but no reason to be fearful.
Stay healthy and trade safe!
Ideas always welcome in the comments. Errors will be amended as comments on TradingView or corrected inline in my blog.
-=x=-=x=-=x=-=x=-=x=-=x=-=x=-
Friday, February 19, 2021
Facts: -2.46%, Volume lower, Closing range: 1%, Body: 80%
Good: Nothing
Bad: Gap down, thick red body, rejected trying to regain the 21d EMA
Highs/Lows: Lower high, lower low
Candle: Mostly red body under a short upper wick, nearly zero lower wick
Advance/Decline: 0.46, 2 declining stocks for every advancing stock
Indexes: SPX (-0.77%), DJI (+0.09%), RUT (-0.69%), VIX (+6.35%)
Sectors: Energy (XLE +3.46%) Financials (XLF +0.39%) were top. Technology (XLK -2.21%), Consumer Discretionary (XLY -2.11%)
Expectation: Lower
-=x=-=x=-=x=-=x=-=x=-=x=-=x=-
Market Overview
It was a tough day for the Nasdaq, big tech, and growth stocks. On days like this, it is important to take a step back and view things from both sides. Avoid trying to make predictions. In this daily update let's look at what's going on more broadly, set an expectation for the index tomorrow and look for a follow-through or an expectation breaker.
The Nasdaq closed the day with a -2.46% decline. The volume was lower, but the move was decisive with a thick red 80% body and a dismal 1% closing range. The candle's short upper wick and nearly invisible lower wick represent a day where the bears ruled on the Nasdaq. Over two stocks declined for every advancing stocks.
The other major indexes faired a bit better. The Dow Jones Industrial (DJI) ended the day with a gain +0.09% thanks much to Walt Disney (DIS +4.41%) and Exxon Mobil (XOM +3.69%). The S&P 500 (SPX) closed down -0.77%. The Russell 2000 (RUT) declined -0.69%.
The VIX volatility index ended the day with a +6.35% day.
It's clear among the sector list that the market was rotating, not really correcting. That doesn't mean it won't correct. Just that today was not part of a correction. 6 of the 11 SPDR sector ETFs ended the day with gains. 8 of the sectors outperformed the broader SPX index.
The sectors at the top of the list were the cyclicals with Energy (XLE +3.46%) and Financials (XLF +0.93%) as the leading two sectors. At the bottom of the list was Consumer Discretionary (XLY -2.11%) and Technology (XLK -2.21%). But also at the bottom of the list was the defensive sector of Utilities (XLU -1.95%). Investors today were looking to move to sectors with new opportunities for returns, not moving into defensive positions.
Another way to look at this is the ETF Fund Flows. You can check etf.com for this data, and it is delayed by one day so we can't see today. But looking at last week, when the market was also pulling back, the total inflows are greater than outflows. Topping the list of inflows are iShares and Vanguard S&P 500 ETFs. The rest of the list is mostly equity ETFs. At the top of the outflows are corporate bonds and long term treasury bonds.
Put that all together and you can see the big picture thinking of money managers. Indicators of increased inflation is driving investors from treasury bonds. The higher yields on those bonds will drive increase interest rates in borrowing for companies that depend on debt to drive growth. The selling of the treasury bonds then in turn can increase defaults among businesses and so investors are also selling off risky High Yield and less risky Investment Grade corporate bonds.
They are also moving from the equities of those companies and sectors with higher debt to companies and sectors with less dependency on debt. So we see an indiscriminate rotation from big tech and growth stocks to cyclical stocks. The market will eventually price in the higher interest rate impact at a more precise level (stock by stock) and you will see a mellowing out of the reaction for some companies.
And all of this…is because…the economy is recovering! That's a good thing!
-=x=-=x=-=x=-=x=-=x=-=x=-=x=-
Economic Indicators
The US Dollar (DXY) declined -0.29%. Yields on the 30y and 10y treasury bond yields rose while 2y treasury bond yields remained flat. The spread between long term and short term bonds widened again.
Both High Yield (HYG) corporate bonds and Investor Grade (LQD) corporate bonds prices declined. However the spread been corporate bonds and treasury bonds remains about even over the past few weeks.
Silver (SILVER) and Gold (GOLD) both advanced. Crude Oil (CRUDEOIL1!) advanced. Timber (WOOD) was about even. Copper (COPPER1!) and Aluminum (ALI1!) both advanced. Both Copper and Aluminum are in high demand as economic activity returns to normal.
-=x=-=x=-=x=-=x=-=x=-=x=-=x=-
Investor Sentiment
The put/call ratio declined to 0.557. The put/call ratio (PCCE) is a contrarian indicator that shows overly bullish or overly bearish investor behavior. The 0.7 level is considered normal. As it approaches 0.60 (overly bullish) and below, watch for a possible pullback in the market.
The CNN Fear & Greed index remains near a normal level, slightly on the Greed side.
-=x=-=x=-=x=-=x=-=x=-=x=-=x=-
Market Leaders
Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOGL) all declined for the day. Apple and Amazon are trading below their 50d moving average. Microsoft moved below its 21d EMA. Alphabet (GOOGL) is still trading above both key moving average lines. Having the big four mega-caps trading below these key indicators will weigh down the index and sentiment for the rest of the market.
Walt Disney and Exxon Mobil were the top mega-caps for the day, helping the Dow Jones Industrial close the day in the positive. There are only 14 mega-caps to close in the positive. Tesla (TSLA) closed down -8.55%, putting the company at the bottom of the mega-cap list for the day.
The daily market update maintains a watch list for Growth Stocks. Exactly zero of them closed in the positive today. Fiverr (FVRR), Enphase (ENPH), UP Fintech (TIGR), Ehang (EH) and Solar Edge (SEDG) all closed with more than a 10% loss for the day.
-=x=-=x=-=x=-=x=-=x=-=x=-=x=-
Looking ahead
Two big economic events scheduled for tomorrow. The first is the Consumer Confidence numbers for February, to be released at 10am. Fed Chair Jerome Powell is also supposed to begin testifying before congress at that time, which will last several hours.
Earnings reports will start to pick up tomorrow. Reports will come from Square (SQ), Intuit (INTU), Upwork (UPWK), among others. Be sure to check the companies in your portfolio for upcoming earnings reports.
-=x=-=x=-=x=-=x=-=x=-=x=-=x=-
Trends, Support and Resistance
The index is in the bottom half of the long-term regression trend channel. The trend lines I draw are the mid-point of the channels.
The long-term trend line from the 10/30 bottom points to a +4.39% gain. That seems unlikely, and would need to push past resistance at the 21d EMA and the 14,000 support/resistance area. With five days of downtrend, I may finally remove this trend line and start a new one.
The five-day trend line points to an advance of +0.39%. That seems like a reasonable move in the short-term.
The one-day trend line is pointing to a -0.30% declined
If there is further downside, the 50d MA line offers an area of support and is -2.3% below Monday's close. The 13,000 level also seems to be an area of support. The index held the 12,550 area recently. If it passes that area, the next support area is 12,250.
-=x=-=x=-=x=-=x=-=x=-=x=-=x=-
Wrap-up
Depending on the shape of your portfolio, you might have had a great day in the market or a terrible day in the market. Looking just at the Nasdaq index, it's enough to make any investor nervous. A gap down and close below a key moving average line.
Take a step back and see what the broader market was doing. Investors were not necessarily exiting equities. Instead they were rotating from companies and sectors that depend on debt for growth and moving to cyclical stocks, especially stocks expected to recover later this year. See Carnival Cruise Lines as an example.
The rotation may not be over. I'm setting an expectation for lower tomorrow based on the chart, but will be watching for an expectation breaker. If it's making you nervous, reduce position sizes in those stocks most exposed. In case a deeper correction does occur, make sure you have stops in place across your portfolio, or be ready to look the other way and ride the dip.
There is reason to be cautious, but no reason to be fearful.
Stay healthy and trade safe!
:O