Weekly Technical Market Outlook 12/29/2014

Welcome back. I hope everyone had an enjoyable Christmas and was able to spend time with family and friends. While trading was a shortened week, the major indices were able to continue their drift higher.

Trend

Of course with the march higher in the S&P 500 ($SPX), the trend remains positive. While we often draw trend lines connecting lows, the chart below shows a trend line connecting the highs over the last year. You’ll notice we are bumping up against this level of potential resistance. We’ll see if traders deem this important based on the price action we see this week.

trend

Breadth
One of the biggest developments that took place last week was the final confirmation in the Common Stock-Only Advance-Decline Line. I had been discussing the divergence in this measure of breadth for the last several months. I’ve noted that the bulk of the other large-cap Advance-Decline Lines had already confirmed. We also saw the small-cap and mid-cap A-D Lines hit new highs as well. The Percentage of Stocks Above Their 200-day Moving Average while making improvement, remains in an established down trend.

breadth

Santa Claus Rally
Many traders have been tweet, writing, and discussing the historical seasonal advance in stocks, dubbed the “Santa Claus Rally.” Ari Wald, who serves as the Head of Technical Analysis at Oppenheimer wrote an article on the subject for The Technical Analyst. Ari turned his focus away from the crowd’s focus of how great Santa is for stocks and looked at what if Santa doesn’t show up. He writes, “However, performance in the next 1 to 2 quarters has tended to be below average when the S&P 500 closes lower during the SCR. For instance, the S&P 500 has averaged a 1.4% loss and a 0.6% loss in the subsequent 3 and 6 months, respectively, following a negative SCR, versus an average 2.8% gain and 5.3% gain, respectively, following a positive SCR.”

So while traders will be disappointed if they don’t get the juiced up gains many are expecting this week. It seems they take out their frustration on stocks during the following couple of months.

santa clauss

Momentum
While breadth has now confirmed the rally in stocks, momentum continues to show a bearish divergence. The Relative Strength Index ans the MACD indicators remain below their prior highs. This isn’t that surprising since the bulk of the bounce off the December low spanned just a couple of days. It’s tough for indicators like the RSI and MACD to snap back as fast as price as, which is why this current divergence is not a huge concern to me at the moment. However, as I wrote about on Dec. 18th, the longer-term view of momentum still favors the bulls.

momentum

Is January Dangerous? 
Dana Lyons, who I’ve mentioned a couple of times on the blog, has continued to produce some great charts and tables. Recently Dana showed this table that goes back to 1900 and marks the number of highs and tops seen in the Dow. You’ll notice that December has seen the fewest short-term (3 month) peaks while January has seen the most short-term and longer-term (12 month) highs going back to 1900. We often hear that October is one of the most ‘dangerous’ months for stocks but Dana’s data shows that it’s actually January that’s seen the most bearish turning points for stocks.

January Dana

Last Week’s Sector Performance
While a shortened week, Utilities ($XLU) remained the best performing sector relative to the S&P 500. Consumer Discretionary ($XLY) which has not had a great year was the second best performing sector followed by Technology ($XLK). Health Care ($XLV), likely lead by biotech, had the worst week, giving reprieve to the Energy Sector ($XLE) for once, which was the second worst performer.

sector week

Year-to-Date Sector Performance
Utilities, Health Care, and Technology remain the best performing sectors relative to the S&P YTD. As oil prices have continued to decline the Energy Sector remains the worst performer.

Sector YTD
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Are Traders Already Preparing For a Rate Hike?

While it seems investors can’t get enough commentary on the eventual Fed Funds Rate increase, it seems they may already be positioning for Yellen to breath the dreadful word… “tightening.”

Josh Brown put up a great table (shown below) prepared by Savita Subramanian’s of BoAML showing sector relative performance going into and during the past three rate hikes. While telecom and utilities are often thought of as the worst performing sectors during the periods of time of Fed tightening interest rate policy, Subramanian’s research shows another sector that traders may want to keep an eye on – Consumer Discretionary (XLY). Over the last three rate hike cycles, the Discretionary sector shown no relative performance strength, which is actually worse than the Telecom and Utility sectors.

Sector rate hikeWhile the Fed has given few if any hints of when  the first rise in their key funds rate will be, the Consumer Discretionary Sector ($XLY) appears traders think it’s already started.

XLY

For the bulk of the bull market off the March 2009 low, the relative performance between the Discretionary Sector and the overall market has been in an uptrend. This relationship then changed at the start of 2014 as XLY began to falter relative to the S&P 500. We’ve also seen a bearish divergence develop on the weekly chart as the Relative Strength Index (RSI) puts in series of lower lows. This weakening of momentum does not bode well the Consumer Discretionary sector and may lead traders to begin applying pressure to prices.

Are traders too early in their positions against the Discretionary Sector or is this just another clue that a rate hike may not be too far in in the distant future?

Source:  Sector Performance During Rate Tightening Cycles (The Reformed Broker)

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Weekly Technical Market Outlook 4/14/2014

Selling continued last week with the Nasdaq taking the brunt of the damage being off 3.10%, the S&P 500 down 2.65%, and the Dow down 2.35%. While the selling continued into the final hours on Friday, it appears the selling was strongest on Thursday, where we saw a larger share of volume and issues declining compared to Friday. We closed out the week with the S&P 500 under its lower Bollinger Band. We saw this occur four times in January before the buyers stepped back in and took the equity index higher.  At the end of trading on Friday we had six of the nine S&P sectors trading under their 50-day Moving Averages, at the January low all but utilities were under their respective 50-day MA.

Equity Trend

With last week’s selling we saw the S&P 500 break through the level of support I highlighted last Monday as well as its 100-day Moving Average. We are still 15 points away from the up trend that’s kept many traders bullish for the last five months. If we see the S&P continue to fall, I’ll be watching this trend line as the next level of potential support.

Trend

Volatility Backwardation

On Friday I tweeted out a chart of the $VIX futures curve and mentioned that April prices were now trading at a premium to May and June, which puts the $VIX into backwardation. This typically happens when option traders become more fearful of short-term volatility than longer-term price swings and has been a fairly good indicator of short-term bottoms in the equity market. Below is a chart of the ratio between the one-month $VIX and the 3-month $VIX in histogram form. When a bar breaks above 1.0 we know that the 1-month is trading above the 3-month (i.e. backwardation).

BackwardationS&P SKEW

Sticking with our fear/risk theme, I noticed an interesting development in the S&P SKEW index. SKEW attempts to measure the ‘tail risk’ within the options market. As the chart below shows, we’ve seen spikes in SKEW prior to previous short-term declines in the S&P ($SPX). For instance we saw a break of 135 prior to the drop in 2012 and more recently we saw SKEW begin to rise again over 135 in December, January, and February. However, we did not see SKEW rise prior to or during the most recent bout of equity weakness. It does not seem that option traders felt this was going to be a 2+ standard deviation event – we’ll see if they were right.

SKEWEquity Breadth

The short-term up trend I’ve been discussing in the Advance-Decline Line has now been broken. While the S&P is under its March low, the A-D Line is still above its March low when looking at all NYSE issues. Although when we focus on just NYSE common stock, it has broken through its respective March low – confirming the weakness in the overall equity market.

equity breadthEquity Momentum

With respect to momentum, we are at an important juncture for the Relative Strength Index. For the duration of the 2013 and start of 2014 up trend the RSI indicator has held above the 35 level, which is the lower end of the bullish range for this momentum indicator. With selling on Friday the RSI is now at 38, just a few points above this critical level of support.

We had a momentum break support in January before buyers rushed back in and took stocks higher but did not push the RSI over 70, this was the first chink the bulls armor. If we see another break under 35, after the Relative Strength Index was unable to get into ‘overbought’ status then we may see the creation of a bearish range as the current short-term correction develops into something more serious.

Momentum

Crude Oil

With oil being in its historically bullish seasonality time period, it is also testing its falling trend line resistance. In March we saw oil drop and test its 100-day Moving Average, creating the lower end of a symmetrical triangle pattern. If price of crude oil can break this trend line resistance then we’ll also need to quickly see a break of the previous short-term high around $105.

Crude Oil

60-Minute S&P 500

In last week’s Technical Market Outlook I discussed the rising trend line off the February and March lows, which is where we had finished up trading two weeks ago. This level eventually broke and support became resistance when buyers attempted to regain control last Wednesday. This sent prices lower and the Relative Strength Index once again sits in ‘oversold’ territory as sellers overwhelmed buyers. We now have a lower-high as a down trend on the 60-minute chart is created. If we see buyers step back in this week then this trend line and the 50-1hr MA will likely be important levels to overcome.

60minLast Week’s Sector Performance

Utilities ($XLU) continued to lead last week with traders seeking shelter in the ‘risk off’ sectors of $XLU and consumer staples ($XLP). Interesting enough, health care ($XLV) was the second worst performer last week, largely due to its near 20% biotech weighting. Finally, financials ($XLF) was the worst relative performance sector last week.

Week Sector

Year-to-Date Sector Performance

I could pretty much copy and paste this portion of the Technical Market Outlook since it doesn’t seem to be changing very much this year. Utilities ($XLU) continue to lead while health care ($XLV) is still the second strongest, it’s lost much of its gain as biotech pulls it lower. Just three sectors are under-performing the S&P 500 YTD, with consumer discretionary (cyclicals) ($XLY) leading the pack of losers.

YTD Sector

Major Events This Week

This week we get another set of inflation data with the CPI report on Tuesday. Import and export data out of China has been weakening so it’ll be interesting to see what the Industrial Production numbers look like on Wednesday and if U.S. manufacturers are seeing any of the ripples from overseas.

Monday: Retail Sales
Tuesday: Consumer Price Index
Wednesday: Housing Starts and Industrial Production
Thursday: Jobless Claims
Friday: Market is closed

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.