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 25, 2021
Facts:+0.69%, Volume higher, Closing range: 74%, Body: 13%
Good: Stayed above the gap from last Wed, bulls fought back in afternoon
Bad: Long sudden trip to the days low, volume heavy on the way down
Highs/Lows: Higher high, lower low
Candle:Similar to bearish doji star, but body a little thick
Advance/Decline: 0.91, more declining than advancing stocks
Indexes: SPX (+0.36%), DJI (-0.12%), RUT (-0.25%), VIX (+5.84%)
Sectors: Utilities (XLU +2.01%) and Consumer Staples (XLP +1.00%) were top. Finance (XLF -0.73%) and Energy (XLE -1.02%) were bottom.
Expectation: Sideways or Lower
There was expectation coming into the week that it would be choppy, but we didn't expect that chop to all happen within 30 minutes. But that's how it goes sometimes. Investors were already playing defense in the opening minutes of the day, despite the index setting a new all-time high. The bears a little late to wake up on a Monday morning, sold-off the index heavily, an hour after opening. But the bulls caught the downward action mid-morning and brought the Nasdaq back to gains in the afternoon.
The Nasdaq closed with a +0.69% gain on higher volume. The closing range of 74% is typically good, but the 13% red body that is entirely above last week's bullish range is a possible reversal pattern. There were less advancing stocks than declining stocks as many stocks did not move back to positive territory after the morning sell-off.
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Tuesday, January 26, 2021
Facts: -0.07%, Volume lower, Closing range: 23%, Body: 56%
Good: Low is well-above last week's highs
Bad: Thich red body relative to rest of candle, closing range
Highs/Lows: Lower high, higher low
Candle:Mostly body with tiny upper and lower wicks, insider day
Advance/Decline: 0.59, more declining stocks than advancing stocks
Indexes: SPX (-0.15%), DJI (-0.07%), RUT (-0.62%), VIX (-0.73%)
Sectors: Communications (XLC +1.36%) and Real Estate (XLRE +1.02%) were top. Materials (XLB -1.38%) and Energy (XLE -2.14%) were bottom.
Expectation: Sideways or Lower
Although some wild happenings continue to occur in the market, the Nasdaq composite index had a rather boring day. And that can be a good thing. Yesterday's big dip and recovery followed a week of huge growth. So a day of mostly sideways action, which held lows well above last week's highs, can be very constructive for the index.
The Nasdaq ended with a -0.07% on lower volume. The closing range of 23% and 56% red body sounds bad, but is within a candle that is only 0.73% from top to bottom. Compare that to the previous days candle that had a 2.70% trading range. There were more declining stocks than advancing stocks.
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Wednesday, January 27, 2021
Facts: -2.61%, Volume higher, Closing range: 22%, Body: 63%
Good: Not much, held support after closing last week's gap.
Bad: Gap down, long red body with late day selling
Highs/Lows: Lower high, lower low
Candle:Mostly body with visible upper and lower wick
Advance/Decline: 0.19, five declining stocks for each advancing stock
Indexes: SPX (-2.57%), DJI (-2.05%), RUT (-1.91%), VIX (61.64%)
Sectors: Real Estate (XLRE -1.28%), Energy (XLE -1.35%) were top. Communications (XLC -3.23%) was bottom.
Expectation: Lower
Today was a little more exciting then yesterday, but not in the way we wanted. The Nasdaq opened with a gap down, chopped back and forth and then sold off after the Fed announcements. The fed will keep current monetary policy and interest rates, but said there are still a lot of headwinds for the economy.
The Nasdaq closed with a -2.61% loss after testing the 21d EMA. Volume was over 60% higher than the previous day. The gap down at open along with the selling during the day resulted in a 19% closing range and a 63% red body. There were five declining stocks for every advancing stock
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Thursday, January 28, 2021
Facts: +0.50%, Volume lower, Closing range: 11%, Body: 7%
Good: Stayed above yesterday's lows
Bad: Selling in the afternoon, could not hold the morning gains
Highs/Lows: Lower high, higher low
Candle:Long upper wick with thin body at bottom of candle
Advance/Decline: 1.29, more advancing than declining stocks
Indexes: SPX (+0.98%), DJI (+0.99%), RUT (-0.10%), VIX (-18.81%)
Sectors: Financial (XLF +1.86%) and Materials (XLB +1.72%) were top. Real Estate (XLRE +0.27%) and Consumer Discretionary (XLY +0.31%) were bottom.
Expectation: Sideways or Lower
The Nasdaq tried to have a bullish day but was turned away by the bears in the afternoon. There was still a gain for the day, but if the market was open another hour, that gain might have been wiped out.
The index closed with a +0.50% for the day. The volume was lower than the previous day, but well above the 50d moving average volume. The closing range of 11% and the 7% body with a long upper shadow, is the result of the morning gains being turned into afternoon selling. Still, at the end of the day there were more advancing stocks than declining stocks.
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Friday, January 29, 2021
Facts: -2.00%, Volume lower, Closing range: 25%, Body: 64%
Good: Closed above 13,000
Bad: Everything else, below 21d EMA, thick red body
Highs/Lows: Lower high, lower low
Candle: Thick red body with visible, but not long, upper and lower wicks.
Advance/Decline: 0.46, two declining for every advancing stock
Indexes: SPX (-1.93%%), DJI (-2.03%), RUT (-1.56%), VIX (+9.53%)
Sectors: Utilities (XLU -0.54%) and Health Services (XLV -0.84%) were top. Energy (XLE -3.32%) and Technology (-2.36%) were bottom.
Expectation: Lower
It was not a great way to end January, which until this week was a rather bullish month for investors. The onslaught of retail traders on hedge funds proved to be too much for the market to handle. Not all of the downside is due to the crazy trading, but some of it is from large hedge investors covering lost short bets by selling long positions. And some of it is likely the added uncertainty that the actions brought to the market. Add to that some mixed vaccine news which has been impacting markets lately.
The index closed with a -2.00% loss to end one of the worst weeks since October. The volume was lower than the previous day, but still above the 50d moving average volume. The closing range of 25% and 64% body shows a decidedly bearish day which brought the index to its first close below the 21d EMA line since early November.
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The Meaning of Life (View on the Week)
There are a number of things to study and learn from this week. Far more than I'll be able to unwrap and understand in this week's market in review. Things like the retail onslaught of hedge funds and free trading platforms will likely be studied in the history books. After an all-time high on Monday morning, things unraveled from there as the week progressed.
As conditions worsened, the put/call ratio got lower, indicating optimism, while the CNN Fear & Greed index moved toward fear. By Wednesday's survey the NAAIM exposure index that tracks money manager's exposure to the market had moved from 112 the previous week to 85 this week.
On Monday's daily update I wrote, "I believe eventually the stock manipulation, whether by a few individuals or a mass community of investors, will cause reaction from market makers, regulators, and lawmakers and have a negative impact on retail investors. It's something to keep monitoring." The impact that is to come is still unfolding, but a few things started to emerge.
The retail trader attack on hedge funds seemingly worked. As Melvin Capital neared bankruptcy from huge losses on short bets, competitors Citadel and Point72 bailed them out with $2.75 billion of investment. A big question to answer is why they bailed out a competitor with a non-controlling investment. Prehaps they already had investments in Melvin to protect. Whatever it is, likely there would have been harm to Citadel and Point72 if Melvin failed. If it could cascade across competitors, then it can cascade further.
On Thursday, retail traders turned their anger on Robinhood as it needed to stop trading of volatile stocks in order to meet financial demands of their arrangement with clearing houses, including Citadel. Robinhood's investors brought another $1 billion of capital to Robinhood so they could continue to operate and open back some trading of the volatile stocks. That only caused another surge in stock prices on Friday, and an expanding list (up to 50 most recently) of stocks that are being limited on the platform.
The story is not over, and we'll continue to watch and learn from this tipping point of retail casino investing. A question yet to be answered is what if Robinhood fails. How far does the damage extend beyond its own members.
The market came into the week already cautious. Monday morning saw the Utilities sector in the lead even before the mid-morning sell-off began. Utilities and Real Estate would stay near the top of the sector list throughout the week and along with Consumer Staples, make up the top three ad the end of the week. The last time Real Estate and Utilities led for a week was in February 2020. No fear. Just fact.
The index made attempts on Tuesday and Thursday to hold support. On Tuesday, the action was mostly sideways even though a slight decline. Bulls attempted a rally on Thursday, only to see the gains get sold off in the afternoon. The regression trend lines that I use all showed gains for Friday. That wasn't so much a sign of a possible upward reversal, it was screaming that we were at the bottom of all three regression trend channels, and heading farther south.
Friday would confirm that direction with another big sell-off. Many will point to the fact that hedge funds needed to sell long positions to cover their short positions. However, that's a small part of the selling. More likely nervousness was ripping through the market as retail traders expand the huge lists of targeted stocks.
The Nasdaq declined -3.49% for the week on the highest weekly volume in its history. The S&P 500 (SPX) declined -1.93%. The Dow Jones Industrial (DHI) declined -2.03%. The Russell 2000 (RUT) declined -1.56%.
The closing range for the week was 12% and the red body covered 82% of the candle. We did get a higher high on Monday. We also got a lower low than the previous week. The open and close are also entirely outside last week's range. That's a solid bearish engulfing candle. The huge gain last week and reversal this week has the appearance of a climax top.
Real Estate ( XLRE ) and Utilities ( XLU ) are the top sectors for the week. Ouch!
None of the sectors ended the week with gains as the S&P 500 pulled back -3.31%.
Utilities led as the market opened on Monday morning. Communications ( XLC ) took a very brief lead on Tuesday, but the Real Estate took the top spot.
Consumer Staples ( XLP ) attempted to take the lead on Wednesday, but couldn't hold the lead and ended in third place.
Energy ( XLE ) was the worst performing sector of the week.
The chart clearly shows the wild ride for the sectors on the last three days of the week. Wednesday had all sectors losing for the day. On Thursday, all sectors advanced . On Friday all sectors declined again.
The relatively smooth ride for Real Estate, Utilities and Consumer Staples represents their position as defense moves for investors. All three sectors represent parts of the economy that must continue, even if other parts are recovering slowly or even failing.
US 10y, 20y and 2y Treasury Bond Yields all declined for the week. However, note that on Friday the 10y and 20y yields rose 1.38% and 1.97% respectively while the 2y yield dropped by -9.44%. Keep in mind that yields go higher when investors are selling and yields go lower when investors are buying. Longer term bonds carry higher risk than shorter term bonds, so this was a quick turn on Friday to reduce risk.
High Yield Corporate Bonds (HYG) prices dropped for the week, which would be expected given the other signs that investors are reducing risk. The more significant sign of investors nervousness is that the Investment Grade Bonds (LQD) prices also dropped.
The US Dollar (DXY) advanced +0.38% for the week.
Silver (SILVER) was up +5.76% while Gold (GOLD) dropped -0.44% for the week.
Crude Oil futures (CRUDEOIL1!) dropped back slightly with a -0.39% loss.
Timber (WOOD) is down -4.31%. Copper (COPPER!1) is down -1.46%. Aluminum (ALI1!) is down +1.03%.
In the previous week, the big four mega-caps drove the rally as they all seemed to break out of price and volume consolidation patterns. However, this week would disappoint investors as three of the four gave back those gains. Apple (AAPL) underperformed the market despite releasing a quarterly update that beat expectations on earnings and revenues.
Microsoft (MSFT) was the only bright spot among these four, outperforming the market and remaining above the breakout from the previous week. Their earnings release was well received among investors with strength across multiple parts of the business. However, it did not escape the selling on Friday and ends the week with a long upper shadow.
Amazon (AMZN) and Alphabet (GOOGL) will report on 2/2.
The put/call ratio (PCCE) ended the week at 0.782, a much better value than previous weeks. However, within the week the PCCE remained very low despite the several signs of trouble in the market. 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 moved into the fear level and has been there for most of the week, despite the put/call ratio indicating optimism most of the week.
Money managers lowered their market exposure from the past week. Last week, exposure was at 112 as measured by the NAAIM exposure index, which is one of the highest leveraged levels since 2017. This week it is down to 85.
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The Week Ahead
The week will kick-off with Manufacturing PMI data for January. The purchasing managers index data jumped in January to its highest point in 14 years as the sector catches up from shutdowns and supply chain issues during the pandemic. That data along with positive manufacturing employment data could provide optimism for investors and bullishness for the US dollar.
Non-manufacturing PMI data will be released on Wednesday. Non-manufacturing has not shown quite as much recovery as the Manufacturing sector.
Additional employment data will be made available on Wednesday, Thursday and Friday.
It will be another busy week of earnings reports from large-cap companies. Thermo Fisher Scientific (TMO) will kick-off the week with earnings before market open on Monday. Tuesday morning will bring earnings updates from Pfizer (PFE), Exxon Mobil (XOM) and United Parcel Service (UPS). Amazon (AMZN) and Alphabet (GOOGL) will release earnings on Tuesday evening. PayPal (PYPL), (Qualcomm (QCOM), and Ebay (EBAY) release earnings on Wednesday. Peloton (PTON) and Fortinet (FTNT) will announce on Thursday.
That is a very abbreviated list of earnings throughout the week. Be sure to check for scheduled earnings reports for stocks in your own portfolio.
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The Bullish Side
The market set another all-time high this past week. That is 10 weeks in a row. The pullback later in the week is expected after such a long run of gains. Although some stocks dropped despite great earnings reports, there are some that were rewarded, such as Microsoft.
The pullbacks achieved what is needed to bring some stability to the market as it continues a bullish run. Investor sentiment was brought back from the high levels of previous weeks and the added caution to the market can help make gains on more solid ground.
The Fed this past week announced a continuation of monetary policy. They will continue purchasing mortgage back securities to keep liquidity in the market. They also will continue the low interest rates that have kept investors out of bonds and into equities and other higher risk/reward assets. The intended impact of higher inflation seemed to begin showing up in the Core PCE data this week, while not so high to cause a change in policy.
The government is still pending additional stimulus. That stimulus when released will inject even more liquidity into the economy and raise confidence for investors. Stimulus checks may just start to unlock consumer spending that has been held back by fears. Help with rent and employment will increase consumer confidence. The record consumer savings accumulated over the past year might just get unleashed into the economy as well.
Great earnings reports from the big mega-caps could bring some new support and even momentum upward to the market…
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The Bearish Side
…Disappointing earnings reports from the big mega-caps could be too much for markets to handle right now.
There is a lot to support the bearish side this week and I covered much of it in "The Meaning of Life" section. The retail traders of WSB did more than just cause damage to a hedge fund. They revealed some fairly big shortcomings in how the market operates, especially when it comes to supporting a massive rush of retail traders. Those cracks in the system are no doubt under deep scrutiny right now by market makers, regulators and legislators. The changes that come may be a shock to the system.
It's clear that investors were moving from riskier assets to safe investments at the end of the week. Sell-off of equities on Friday, as well as corporate high yield and investment grade bonds. Move from long-term to short-term treasury bonds. The put/call ratio moved significantly upward as investors hedged against losses.
Despite Democrats controlling both sides of congress, the stimulus, or parts of it, may never get passed. Some are seeing that stimulus checks are not having the intended impact and want to reduce the amount, or the thresholds of income for people who receive them. Other rescue packages might feel too big or too broad and get nay votes even from Democrats.
The charts surely warn of a breakdown in the index. It market doesn't have to continue downward, but that's the direction the bearish engulfing candle is telling us now.
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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
There are some things to be nervous about this week. Signs have shown since Monday that the market is not just pulling back but reversing downward. However, that direction is not written in stone. The market can decide when it wants to go up and when it wants to go down.
It's a good time to rank the investments you have and decide which ones require some reduction in exposure. However, keep an open mind to the ones still showing strength.
Finally, pullbacks are the best time to watch for relative strength of stocks in the market. Look for those stocks that are not dropping as fast or far as the index. These stocks will likely do the best when an upside reversal comes.
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 25, 2021
Facts:+0.69%, Volume higher, Closing range: 74%, Body: 13%
Good: Stayed above the gap from last Wed, bulls fought back in afternoon
Bad: Long sudden trip to the days low, volume heavy on the way down
Highs/Lows: Higher high, lower low
Candle:Similar to bearish doji star, but body a little thick
Advance/Decline: 0.91, more declining than advancing stocks
Indexes: SPX (+0.36%), DJI (-0.12%), RUT (-0.25%), VIX (+5.84%)
Sectors: Utilities (XLU +2.01%) and Consumer Staples (XLP +1.00%) were top. Finance (XLF -0.73%) and Energy (XLE -1.02%) were bottom.
Expectation: Sideways or Lower
There was expectation coming into the week that it would be choppy, but we didn't expect that chop to all happen within 30 minutes. But that's how it goes sometimes. Investors were already playing defense in the opening minutes of the day, despite the index setting a new all-time high. The bears a little late to wake up on a Monday morning, sold-off the index heavily, an hour after opening. But the bulls caught the downward action mid-morning and brought the Nasdaq back to gains in the afternoon.
The Nasdaq closed with a +0.69% gain on higher volume. The closing range of 74% is typically good, but the 13% red body that is entirely above last week's bullish range is a possible reversal pattern. There were less advancing stocks than declining stocks as many stocks did not move back to positive territory after the morning sell-off.
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Tuesday, January 26, 2021
Facts: -0.07%, Volume lower, Closing range: 23%, Body: 56%
Good: Low is well-above last week's highs
Bad: Thich red body relative to rest of candle, closing range
Highs/Lows: Lower high, higher low
Candle:Mostly body with tiny upper and lower wicks, insider day
Advance/Decline: 0.59, more declining stocks than advancing stocks
Indexes: SPX (-0.15%), DJI (-0.07%), RUT (-0.62%), VIX (-0.73%)
Sectors: Communications (XLC +1.36%) and Real Estate (XLRE +1.02%) were top. Materials (XLB -1.38%) and Energy (XLE -2.14%) were bottom.
Expectation: Sideways or Lower
Although some wild happenings continue to occur in the market, the Nasdaq composite index had a rather boring day. And that can be a good thing. Yesterday's big dip and recovery followed a week of huge growth. So a day of mostly sideways action, which held lows well above last week's highs, can be very constructive for the index.
The Nasdaq ended with a -0.07% on lower volume. The closing range of 23% and 56% red body sounds bad, but is within a candle that is only 0.73% from top to bottom. Compare that to the previous days candle that had a 2.70% trading range. There were more declining stocks than advancing stocks.
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Wednesday, January 27, 2021
Facts: -2.61%, Volume higher, Closing range: 22%, Body: 63%
Good: Not much, held support after closing last week's gap.
Bad: Gap down, long red body with late day selling
Highs/Lows: Lower high, lower low
Candle:Mostly body with visible upper and lower wick
Advance/Decline: 0.19, five declining stocks for each advancing stock
Indexes: SPX (-2.57%), DJI (-2.05%), RUT (-1.91%), VIX (61.64%)
Sectors: Real Estate (XLRE -1.28%), Energy (XLE -1.35%) were top. Communications (XLC -3.23%) was bottom.
Expectation: Lower
Today was a little more exciting then yesterday, but not in the way we wanted. The Nasdaq opened with a gap down, chopped back and forth and then sold off after the Fed announcements. The fed will keep current monetary policy and interest rates, but said there are still a lot of headwinds for the economy.
The Nasdaq closed with a -2.61% loss after testing the 21d EMA. Volume was over 60% higher than the previous day. The gap down at open along with the selling during the day resulted in a 19% closing range and a 63% red body. There were five declining stocks for every advancing stock
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Thursday, January 28, 2021
Facts: +0.50%, Volume lower, Closing range: 11%, Body: 7%
Good: Stayed above yesterday's lows
Bad: Selling in the afternoon, could not hold the morning gains
Highs/Lows: Lower high, higher low
Candle:Long upper wick with thin body at bottom of candle
Advance/Decline: 1.29, more advancing than declining stocks
Indexes: SPX (+0.98%), DJI (+0.99%), RUT (-0.10%), VIX (-18.81%)
Sectors: Financial (XLF +1.86%) and Materials (XLB +1.72%) were top. Real Estate (XLRE +0.27%) and Consumer Discretionary (XLY +0.31%) were bottom.
Expectation: Sideways or Lower
The Nasdaq tried to have a bullish day but was turned away by the bears in the afternoon. There was still a gain for the day, but if the market was open another hour, that gain might have been wiped out.
The index closed with a +0.50% for the day. The volume was lower than the previous day, but well above the 50d moving average volume. The closing range of 11% and the 7% body with a long upper shadow, is the result of the morning gains being turned into afternoon selling. Still, at the end of the day there were more advancing stocks than declining stocks.
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Friday, January 29, 2021
Facts: -2.00%, Volume lower, Closing range: 25%, Body: 64%
Good: Closed above 13,000
Bad: Everything else, below 21d EMA, thick red body
Highs/Lows: Lower high, lower low
Candle: Thick red body with visible, but not long, upper and lower wicks.
Advance/Decline: 0.46, two declining for every advancing stock
Indexes: SPX (-1.93%%), DJI (-2.03%), RUT (-1.56%), VIX (+9.53%)
Sectors: Utilities (XLU -0.54%) and Health Services (XLV -0.84%) were top. Energy (XLE -3.32%) and Technology (-2.36%) were bottom.
Expectation: Lower
It was not a great way to end January, which until this week was a rather bullish month for investors. The onslaught of retail traders on hedge funds proved to be too much for the market to handle. Not all of the downside is due to the crazy trading, but some of it is from large hedge investors covering lost short bets by selling long positions. And some of it is likely the added uncertainty that the actions brought to the market. Add to that some mixed vaccine news which has been impacting markets lately.
The index closed with a -2.00% loss to end one of the worst weeks since October. The volume was lower than the previous day, but still above the 50d moving average volume. The closing range of 25% and 64% body shows a decidedly bearish day which brought the index to its first close below the 21d EMA line since early November.
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The Meaning of Life (View on the Week)
There are a number of things to study and learn from this week. Far more than I'll be able to unwrap and understand in this week's market in review. Things like the retail onslaught of hedge funds and free trading platforms will likely be studied in the history books. After an all-time high on Monday morning, things unraveled from there as the week progressed.
As conditions worsened, the put/call ratio got lower, indicating optimism, while the CNN Fear & Greed index moved toward fear. By Wednesday's survey the NAAIM exposure index that tracks money manager's exposure to the market had moved from 112 the previous week to 85 this week.
On Monday's daily update I wrote, "I believe eventually the stock manipulation, whether by a few individuals or a mass community of investors, will cause reaction from market makers, regulators, and lawmakers and have a negative impact on retail investors. It's something to keep monitoring." The impact that is to come is still unfolding, but a few things started to emerge.
The retail trader attack on hedge funds seemingly worked. As Melvin Capital neared bankruptcy from huge losses on short bets, competitors Citadel and Point72 bailed them out with $2.75 billion of investment. A big question to answer is why they bailed out a competitor with a non-controlling investment. Prehaps they already had investments in Melvin to protect. Whatever it is, likely there would have been harm to Citadel and Point72 if Melvin failed. If it could cascade across competitors, then it can cascade further.
On Thursday, retail traders turned their anger on Robinhood as it needed to stop trading of volatile stocks in order to meet financial demands of their arrangement with clearing houses, including Citadel. Robinhood's investors brought another $1 billion of capital to Robinhood so they could continue to operate and open back some trading of the volatile stocks. That only caused another surge in stock prices on Friday, and an expanding list (up to 50 most recently) of stocks that are being limited on the platform.
The story is not over, and we'll continue to watch and learn from this tipping point of retail casino investing. A question yet to be answered is what if Robinhood fails. How far does the damage extend beyond its own members.
The market came into the week already cautious. Monday morning saw the Utilities sector in the lead even before the mid-morning sell-off began. Utilities and Real Estate would stay near the top of the sector list throughout the week and along with Consumer Staples, make up the top three ad the end of the week. The last time Real Estate and Utilities led for a week was in February 2020. No fear. Just fact.
The index made attempts on Tuesday and Thursday to hold support. On Tuesday, the action was mostly sideways even though a slight decline. Bulls attempted a rally on Thursday, only to see the gains get sold off in the afternoon. The regression trend lines that I use all showed gains for Friday. That wasn't so much a sign of a possible upward reversal, it was screaming that we were at the bottom of all three regression trend channels, and heading farther south.
Friday would confirm that direction with another big sell-off. Many will point to the fact that hedge funds needed to sell long positions to cover their short positions. However, that's a small part of the selling. More likely nervousness was ripping through the market as retail traders expand the huge lists of targeted stocks.
The Nasdaq declined -3.49% for the week on the highest weekly volume in its history. The S&P 500 (SPX) declined -1.93%. The Dow Jones Industrial (DHI) declined -2.03%. The Russell 2000 (RUT) declined -1.56%.
The closing range for the week was 12% and the red body covered 82% of the candle. We did get a higher high on Monday. We also got a lower low than the previous week. The open and close are also entirely outside last week's range. That's a solid bearish engulfing candle. The huge gain last week and reversal this week has the appearance of a climax top.
Real Estate ( XLRE ) and Utilities ( XLU ) are the top sectors for the week. Ouch!
None of the sectors ended the week with gains as the S&P 500 pulled back -3.31%.
Utilities led as the market opened on Monday morning. Communications ( XLC ) took a very brief lead on Tuesday, but the Real Estate took the top spot.
Consumer Staples ( XLP ) attempted to take the lead on Wednesday, but couldn't hold the lead and ended in third place.
Energy ( XLE ) was the worst performing sector of the week.
The chart clearly shows the wild ride for the sectors on the last three days of the week. Wednesday had all sectors losing for the day. On Thursday, all sectors advanced . On Friday all sectors declined again.
The relatively smooth ride for Real Estate, Utilities and Consumer Staples represents their position as defense moves for investors. All three sectors represent parts of the economy that must continue, even if other parts are recovering slowly or even failing.
US 10y, 20y and 2y Treasury Bond Yields all declined for the week. However, note that on Friday the 10y and 20y yields rose 1.38% and 1.97% respectively while the 2y yield dropped by -9.44%. Keep in mind that yields go higher when investors are selling and yields go lower when investors are buying. Longer term bonds carry higher risk than shorter term bonds, so this was a quick turn on Friday to reduce risk.
High Yield Corporate Bonds (HYG) prices dropped for the week, which would be expected given the other signs that investors are reducing risk. The more significant sign of investors nervousness is that the Investment Grade Bonds (LQD) prices also dropped.
The US Dollar (DXY) advanced +0.38% for the week.
Silver (SILVER) was up +5.76% while Gold (GOLD) dropped -0.44% for the week.
Crude Oil futures (CRUDEOIL1!) dropped back slightly with a -0.39% loss.
Timber (WOOD) is down -4.31%. Copper (COPPER!1) is down -1.46%. Aluminum (ALI1!) is down +1.03%.
In the previous week, the big four mega-caps drove the rally as they all seemed to break out of price and volume consolidation patterns. However, this week would disappoint investors as three of the four gave back those gains. Apple (AAPL) underperformed the market despite releasing a quarterly update that beat expectations on earnings and revenues.
Microsoft (MSFT) was the only bright spot among these four, outperforming the market and remaining above the breakout from the previous week. Their earnings release was well received among investors with strength across multiple parts of the business. However, it did not escape the selling on Friday and ends the week with a long upper shadow.
Amazon (AMZN) and Alphabet (GOOGL) will report on 2/2.
The put/call ratio (PCCE) ended the week at 0.782, a much better value than previous weeks. However, within the week the PCCE remained very low despite the several signs of trouble in the market. 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 moved into the fear level and has been there for most of the week, despite the put/call ratio indicating optimism most of the week.
Money managers lowered their market exposure from the past week. Last week, exposure was at 112 as measured by the NAAIM exposure index, which is one of the highest leveraged levels since 2017. This week it is down to 85.
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The Week Ahead
The week will kick-off with Manufacturing PMI data for January. The purchasing managers index data jumped in January to its highest point in 14 years as the sector catches up from shutdowns and supply chain issues during the pandemic. That data along with positive manufacturing employment data could provide optimism for investors and bullishness for the US dollar.
Non-manufacturing PMI data will be released on Wednesday. Non-manufacturing has not shown quite as much recovery as the Manufacturing sector.
Additional employment data will be made available on Wednesday, Thursday and Friday.
It will be another busy week of earnings reports from large-cap companies. Thermo Fisher Scientific (TMO) will kick-off the week with earnings before market open on Monday. Tuesday morning will bring earnings updates from Pfizer (PFE), Exxon Mobil (XOM) and United Parcel Service (UPS). Amazon (AMZN) and Alphabet (GOOGL) will release earnings on Tuesday evening. PayPal (PYPL), (Qualcomm (QCOM), and Ebay (EBAY) release earnings on Wednesday. Peloton (PTON) and Fortinet (FTNT) will announce on Thursday.
That is a very abbreviated list of earnings throughout the week. Be sure to check for scheduled earnings reports for stocks in your own portfolio.
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The Bullish Side
The market set another all-time high this past week. That is 10 weeks in a row. The pullback later in the week is expected after such a long run of gains. Although some stocks dropped despite great earnings reports, there are some that were rewarded, such as Microsoft.
The pullbacks achieved what is needed to bring some stability to the market as it continues a bullish run. Investor sentiment was brought back from the high levels of previous weeks and the added caution to the market can help make gains on more solid ground.
The Fed this past week announced a continuation of monetary policy. They will continue purchasing mortgage back securities to keep liquidity in the market. They also will continue the low interest rates that have kept investors out of bonds and into equities and other higher risk/reward assets. The intended impact of higher inflation seemed to begin showing up in the Core PCE data this week, while not so high to cause a change in policy.
The government is still pending additional stimulus. That stimulus when released will inject even more liquidity into the economy and raise confidence for investors. Stimulus checks may just start to unlock consumer spending that has been held back by fears. Help with rent and employment will increase consumer confidence. The record consumer savings accumulated over the past year might just get unleashed into the economy as well.
Great earnings reports from the big mega-caps could bring some new support and even momentum upward to the market…
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The Bearish Side
…Disappointing earnings reports from the big mega-caps could be too much for markets to handle right now.
There is a lot to support the bearish side this week and I covered much of it in "The Meaning of Life" section. The retail traders of WSB did more than just cause damage to a hedge fund. They revealed some fairly big shortcomings in how the market operates, especially when it comes to supporting a massive rush of retail traders. Those cracks in the system are no doubt under deep scrutiny right now by market makers, regulators and legislators. The changes that come may be a shock to the system.
It's clear that investors were moving from riskier assets to safe investments at the end of the week. Sell-off of equities on Friday, as well as corporate high yield and investment grade bonds. Move from long-term to short-term treasury bonds. The put/call ratio moved significantly upward as investors hedged against losses.
Despite Democrats controlling both sides of congress, the stimulus, or parts of it, may never get passed. Some are seeing that stimulus checks are not having the intended impact and want to reduce the amount, or the thresholds of income for people who receive them. Other rescue packages might feel too big or too broad and get nay votes even from Democrats.
The charts surely warn of a breakdown in the index. It market doesn't have to continue downward, but that's the direction the bearish engulfing candle is telling us now.
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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 21d EMA turned from a support line to a resistance line during the week. You can see this from intraday charts. It is at 13,165.22. Getting past this resistance is the first step.
- The next challenge is getting back through the gap created the previous week and into the overhead supply resistance. That is right around the 10d MA at 13,366.74.
- If the index can move into the overhead supply, it may be a bit choppy, but it can start to head toward a new all-time high at 13,728.98.
On the downside, there are several key levels to raise caution flags:
- The low of the week this past week is 12,985.05. Not creating a new low will be the first test of the downside.
- There is support at the 13,000 area, seen in the lows from the first week of 1/11.
- The 50d MA is at 12,720.83. A violation of this line will be an added warning side. It has not been tested since 11/4.
- Several possible areas of support at 12,550, 12,250, and 12,000.
- The 200d MA moved above the lows of October and is now about 15% below the index at 11,041.56.
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Wrap-up
There are some things to be nervous about this week. Signs have shown since Monday that the market is not just pulling back but reversing downward. However, that direction is not written in stone. The market can decide when it wants to go up and when it wants to go down.
It's a good time to rank the investments you have and decide which ones require some reduction in exposure. However, keep an open mind to the ones still showing strength.
Finally, pullbacks are the best time to watch for relative strength of stocks in the market. Look for those stocks that are not dropping as fast or far as the index. These stocks will likely do the best when an upside reversal comes.
Good luck, stay healthy and trade safe!
