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 daily charts for more detail on sectors, indexes and market leaders each day.
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Monday, March 15, 2021
Facts: +1.05%, Volume higher, Closing range: 100%, Body: 73%
Good: Close above last week's high and back above 50d MA
Bad: Nothing
Highs/Lows: Higher high, higher low
Candle: No upper wick, most green body over lower wick
Advance/Decline: About even advancing and declining stocks
Indexes: SPX (+0.65%), DJI (+0.53%), RUT (+0.31%), VIX (-3.19%)
Sectors: Consumer Discretionary (XLY +1.34%) and Utilities (XLU +1.28%) were top. Financials (XLF -0.58%) and Energy (XLE -1.14%)
Expectation: Sideways or Higher
It was a relatively smooth start to the week as bond yields stayed fairly tame compared to previous weeks. That allowed the tech heavy Nasdaq to continue a rally to catch up with the other indexes. There is still more catchup to do as the S&P 500, Dow Jones Industrial average and Russell 2000 set new all-time highs.
After a brief test of the 21d EMA line, the Nasdaq rallied into close for a +1.05% gain on higher volume. The volume increased as the index moved up in the last 30 minutes of trading to end the day with a 100% closing range. The 73% green body is above a lower wick formed from some selling before noon. There were about the same number of advancing stocks as declining stocks.
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Tuesday, March 16, 2021
Facts: +0.09%, Volume lower, Closing range: 33%, Body: 23%
Good: Higher high, higher low, successful test of 50d MA
Bad: Low closing range, longer upper wick, could not hold morning rally
Highs/Lows: Higher high, higher low
Candle: Thin red body underneath a long upper wick
Advance/Decline: Over three declining stocks for every advancing stocks
Indexes: SPX (-0.16%), DJI (-0.39%), RUT (-1.72%), VIX (-1.20%)
Sectors: Communications (XLC +1.05%) and Technology (XLK +0.75%) were top. Industrials (XLI -1.42%) and Energy (XLE -2.85%) were bottom.
Expectation: Sideways or Lower
An attempted rally in the morning sold off as investors reacted to disappointing economic data, both for February retails sales and industrial and manufacturing production. Gains were limited to fewer stocks and dominated by mega-caps.
The Nasdaq closed with a +0.09% gain, but that was down from a 1.19% gain earlier in the day. After testing the 50d MA, the index bounced back up to close a bit below where it opened and leaving behind a 23% red body. The 33% closing range is not great, but the volume was lower than the previous day and lower than average. There were over three declining stocks for every advancing stock.
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Wednesday, March 17, 2021
Facts: +0.40%, Volume higher, Closing range: 78%, Body: 58%
Good: High closing range on slightly higher volume, support at 21d EMA
Bad: Lower high, lower low, dipped below 50d MA
Highs/Lows: Lower high, lower low
Candle: Green body covers most of candle, similar upper and lower wicks
Advance/Decline: About even advancing and declining stocks
Indexes: SPX (+0.29%), DJI (+0.58%), RUT (+0.73%), VIX (-2.83%)
Sectors: Consumer Discretionary (XLY +1.40%) and Industrials (XLI +1.15%) were top. Health (XLV -0.36%) and Utilities (XLU -1.63%) were bottom.
Expectation: Sideways or Higher
Investors got what they needed to hear from the fed's Jerome Powell. Interest rates will remain untouched and there will be no tapering of bond buying despite a big upgrade in the fed's outlook on the economy. The change in investor sentiment mid-day was clear as the indexes made a rally.
The Nasdaq closed with a +0.4% gain after dipping below the 50d MA and 21d EMA in the morning. The dip came as yields soared and investors worried about what was to come from the Fed meeting. After rallying in the afternoon, the index closed on slightly higher volume with a 78% closing range. The short upper wick above a 58% green body was formed from a small pullback just before close. There were about equal number of advancing and declining stocks.
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Thursday, March 18, 2021
Facts: -3.02%, Volume higher, Closing range: 5%, Body: 82%
Good: Nothing
Bad: Broke below 50d MA and 21d EMA, selling most of the day
Highs/Lows: Lower high, lower low
Candle: Mostly red body, with no visible lower wick
Advance/Decline: Four declining stocks for every advancing stock
Indexes: SPX (-1.48%), DJI (-0.46%), RUT (-2.94%), VIX (+12.22%)
Sectors: Financials (XLY +0.52%) was the only sector with gains. Technology (XLK -2.77%) and Energy (XLE -4.49%) were the worst performing.
Expectation: Lower
Did the market wake up with a hangover? After the positive news from the Fed caused a rally late yesterday, the market took a turn downward today. It started again with a surge in bond yields that impact the valuation of big tech and growth stocks.
The Nasdaq closed down -3.02% in a painfully red session with only a 5% closing range. The 82% red body with no visible lower wick shows the selling throughout the day. A pause at the 21d EMA could not hold and the selling regained steam into close. There were 4 declining stocks for every advancing stock.
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Friday, March 19, 2021
Facts: +0.76%, Volume higher, Closing range: 83%, Body: 45%
Good: Support at 13,000 to start morning rally
Bad: Rally lost steam in afternoon, lower high, lower low
Highs/Lows: Lower high, lower low
Candle: Thin green body with lower wick slightly longer than upper wick
Advance/Decline: One advancing stock for every declining stock
Indexes: SPX (-0.06%), DJI (-0.71%), RUT (+0.88%), VIX (-2.92%)
Sectors: Communications (XLC +0.87%) and Consumer Discretionary (XLY +0.60%) were top sectors. Financials (XLF -1.16%) and Real Estate (XLRE -1.33%) were bottom.
Expectation: Sideways
The markets ended another choppy week with one more rotation as investors continue to adjust against what's happening in the bond market. Yesterday's sale of bonds settled down and investors moved back into some growth stocks. But it was not a broad rally, with the Dow Jones Industrial and S&P 500 ending the day with losses.
The Nasdaq gained +0.76% on higher volume, but made a new low compared to the previous day and didn’t manage a new high. The closing range of 83% with a 45% green body is from a bullish intraday that testing the 13,000 area and then rallied into the afternoon. The upper wick formed from a tapering in prices after the morning rally stalled. There were more advancing stocks than declining stocks.
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The Meaning of Life (View on the Week)
This week was marked by a battle between the markets and the fed. Investors had to choose what to believe and how to respond. The week started with some nervousness on Monday morning with investors buying up defensive stocks in Utilities in the morning. By afternoon, that nervousness faded as treasury bond yields declined and confidence grew as the market rallied.
Tuesday's disappointing retail sales for February didn't seem to have an impact in the morning. Yields were lower at market open, causing Technology and Communication Services stocks to rally. However, markets faded as yields rose throughout the day. By the end of the day, there were more decliners than advancers and the Nasdaq barely held onto a gain for the day.
Wednesday was the pivotal day and could define how the market behave for the near term. The Federal Open Market Committee met to discuss the economic outlook and any changes to monetary policy. Jerome Powell spoke in early afternoon and was firm that interest rates would remain low through 2023 despite a better outlook on the economy for 2021. In addition, the Fed would continue to buy treasury bonds and mortgage-backed securities to keep borrowing costs down and investment in growth high.
Powell's statement was just what the market wanted to here and stocks rallied into the close on Wednesday. Utilities sank to the bottom of the sector list while Consumer Discretionary and Industrials soared on the enthusiasm. The VIX volatility index dropped to its lowest level since February of 2020. The rally wouldn't last long though.
Before the market opened on Thursday morning, treasury bonds sold off sharply and yields rose, bringing the yield curve to its steepest point since 2015. What was all the fuss about? Some of it could be uncertainty that remained in the bond market, maybe investors thinking Powell is underestimated or overestimated the economic rebound for 2021. Initial Jobless Claims were worse than expected, hinting toward more economic trouble New lockdowns in Europe not only hit Oil Prices and the Energy sector, but could make short and long term bonds less favorable.
The underlying tone of the steep yield curve echoes the message from Jerome Powell. There is confidence in the shorter term economic recovery, keeping short term yields low. However, by the FOMC and Powell not seeing changes in monetary policy means they still are not confident about the longer term recovery. Investors are following Powell's caution about the longer term and therefore yields are rising faster on longer term bonds.
Whatever the reasons, Thursday was marked with broad selling across every sector except Financials. The VIX soared 18% at its intraday high. Mega-caps, growth stocks, energy stocks, almost everything sold off for the day. The Nasdaq lost the 21d EMA and 50d MA lines again and rested just above the 13k area.
Friday ended with gains for the Nasdaq, but was a triple-witching day where stock options, stock index futures , and stock index option contracts all expire on the same day. That makes it tough to discern what stocks were bought on high demand or in order to fulfill expiring contracts. Investors will have to wait until Monday to find out which way the market wants to move from here.
The Nasdaq closed the week with a -0.79% decline on higher volume. The closing range of 30% shows the underlying weakness of Friday's short rally. It was good to have an upside reversal to close the week, but it wasn't enough to build confidence heading into next week.
The Nasdaq did set a higher high and a higher low than the previous week. And the high was better than the high from two weeks ago. That's good news, but the mid-week rallies could not hold the highs for any of the indexes.
The Russell 2000 (RUT) lost -2.77% for the week. The S&P 500 (SPX) ended down -0.77% and the Dow Jones Industrial average (DJI) declined -0.46%.
The VIX volatility index closed the week with a +1.26 gain.
The sectors were all over the place this week, all driven by nervousness about an overheating economy and how the fed might react.
Monday started the week with the defensive sector Utilities ( XLU ) at the top.
On Tuesday, Retail sales data for February showed the economy wasn't overheating and inflation may not be on the rise. That gave investors some confidence and despite bond yields rising, interest rate sensitive sectors such as Technology ( XLK ) and Communication Services ( XLC ) rose to the top.
After the FOMC meeting on Wednesday, Jerome Powell acknowledge the increased outlook on the economy for 2021, but made a firm statement that interest rates would not be raised and bond purchasing programs would continue. You can clearly see the spike in Technology and Communications again after 2:00p on Wednesday.
But then bond investors had their reaction on Thursday. As market open approached, bond investors sold heavily in the morning, sending yields on a surge again. Industrials ( XLI ) did well for most of the day but sold off before close. Only Financials ( XLF ) ended the day with a gain.
Finally on Friday, bond yields climbed but at a smaller rate with the yield curve flattening a bit. That allowed several sectors to find some upside. Communication Services ended the week as the top sector.
Energy ( XLE ) was the worst performing sector of the week as crude oil prices plummeted on less demand, losing over 7.5% and dragging down the Dow Jones Industrial average (DJI) with it.
Keep in mind that treasury bond yields are still not extraordinarily high. The US 30y yield and US 10y yield are returning to 2019 and early 2020 levels. But the signal to read from the chart is the yield curve. You can see the US 2y yield has barely moved in relation to the longer term yields. That means investors are seeing less risk in the short term, but more risk in the longer term.
The yield curve is at its steepest point since 2015. However, in 2015 it wasn't particularly steep. The concern though is that the trend is toward steepening, and that the only reason it hasn't accelerated further is because the fed is buying bonds to control the yield curve. If the bond buying stopped, it would cause even more volatility in both bonds and equities. The definition of "Taper Tantrum".
High Yields Corporate Bonds (HYG) and Investment Grade (LQD) corporate bond prices both declined for the week. The spread between corporate bonds and short term treasury bonds remain about the same.
The US Dollar (DXY) advanced +0.25% for the week and seems to be basing around the current support area.
Silver (SILVER) and Gold (GOLD) both advanced for a second week.
Crude Oil Futures (CRUDEOIL1!) declined sharply on fears of less demand.
Timber (WOOD) declined, but still trading near all-time highs. Copper (COPPER1!) declined while Aluminum (ALI1!) advanced, but both still showing upward trends.
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The Big Four Mega-caps
All four of the largest mega-caps declined for the week. On the weekly chart, I track against the 10 week and 40 week moving averages. Only Alphabet (GOOGL) is trading above both lines. Amazon (AMZN) is below both lines and the 10 week line is about to pass under the 40 week line. Microsoft (MSFT) moved below the 10 week line, but still trades above the 40 week line. Apple (AAPL) has been trading below the 10 week line, but above the 40 week line for the past several weeks.
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The Four Recovery Stocks
I picked four recovery stocks to track against the indexes and other indicators in this weekly report. This week, Exxon Mobil (XOM) pulled back almost 9% along with other energy stocks. Delta Airlines (DAL) also had losses for the week on fears that transportation may not rebound as quickly as previously thought. Carnival Cruise Lines (CCL) and Marriott (MAR) had gains but did not end the week with a bullish follow through.
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Investor Sentiment
The put/call ratio (PCCE) ended the week at 0.696. 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 CNN Fear & Greed index is near to the neutral territory.
The NAAIM exposure index moved up to 78.55.
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The Week Ahead
Existing Home Sales data will be released on Monday right after market open.
On Tuesday, New Home Sales data will be released. Also, API Weekly Crude Oil stock will be revealed.
Several economic news will be released on Wednesday. Durable Goods Orders for February will give a heads-up on manufacturing activity. That will be measured against Manufacturing and Services purchasing data for March which can indicate some direction on increasing or decreasing activity in these sectors. Crude Oil Inventory data will also be released.
Fed Chairman Jerome Powell is scheduled to testify before congress on Wednesday. His statements are always watched closely for possible sentiment changes. Given the situation expect him to make very measured statements on economic outlook and reaffirm that monetary policy will not change.
Thursday will bring an update on 2020 Q4 GDP numbers. Initial Jobless Claims will also be watch closely for trends in the labor market.
On Friday, the most watched data will likely be the producer price index data that will show how much cost is going into produced goods. It's typically a good early indicator on inflation, but there is enough pressure on consumer prices right now that increased costs by producers doesn't necessarily translate to consumer price increases.
Tencent Music Entertainment (TME) will release earnings on Monday.
Adobe (ADBE) will release earnings on Tuesday. Let's not fool ourselves that it actually matters, but it's still interesting that GameStop (GME) will also announce earnings on Tuesday.
Tencent (TCEHY), General Mills (GIS), RH (RH), KB Home (KBH), GrowGeneration (GRWG), and Guess (GES) are all reporting earnings on Wednesday.
For the daily/weekly update, there are no interesting earnings releases on Thursday.
On Friday, Up Fintech (TIGER) will release their earnings update.
Be sure to check your portfolio for upcoming earnings reports.
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The Bullish Side
Don't fight the fed! Jerome Powell could not have been clearer that interest rates will remain low and that bond buying programs will continue, even as the FOMC increased their outlook for the economy in 2021. Ultimately that will be good news for American individuals and companies that want to borrow money.
There is rotation from high growth stocks that were performing well in 2020 to cyclical and recovery stocks that are expected to do well in 2021. But overall money continues to pour into US equity markets from both domestic and foreign investors.
In order to buy US equities, foreign investors must first by the US Dollar which is now starting to strengthen compared to other currencies. That will attract investors back to US Dollar based instruments, including bonds as a safe haven, stabilizing yields.
US consumers will soon have stimulus checks and will start to spend no only the checks, but a record amount of savings build up during the pandemic. That will be a boon for everything from retail to leisure and travel.
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The Bearish Side
The economic recovery is looking great, but it may be better than what Jerome Powell and the FOMC is predicting. As consumers start to spend and the demand for goods and services gets ahead of the capacity and materials, that will drive up prices. That would accelerate inflation to a level that requires a response from the Fed. Any change in monetary policy will certainly be met with a reaction by the market. That may be months away, but the market is always ahead of the reality.
Treasury bond yield volatility is scaring investors. As long as yields can spike at any moment, investors will be fickle and rotations will continue to wreak havoc on equities. The volatility in both bonds and equities will have global investors looking elsewhere to find more stable and predictable returns.
Growth stocks outpaced value stocks at a historical rate in 2020. Value stocks have been catching up this year, but there is still some catch up and maybe correction before this rotation is done. b
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Key Nasdaq Levels to Watch
The Nasdaq is at a decision point right now with two key levels to watch for on the bullish and bearish side.
On the positive side, the level we want to reach is 13,620.71, but there's a few levels to pass before that happens:
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 daily charts for more detail on sectors, indexes and market leaders each day.
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Monday, March 15, 2021
Facts: +1.05%, Volume higher, Closing range: 100%, Body: 73%
Good: Close above last week's high and back above 50d MA
Bad: Nothing
Highs/Lows: Higher high, higher low
Candle: No upper wick, most green body over lower wick
Advance/Decline: About even advancing and declining stocks
Indexes: SPX (+0.65%), DJI (+0.53%), RUT (+0.31%), VIX (-3.19%)
Sectors: Consumer Discretionary (XLY +1.34%) and Utilities (XLU +1.28%) were top. Financials (XLF -0.58%) and Energy (XLE -1.14%)
Expectation: Sideways or Higher
It was a relatively smooth start to the week as bond yields stayed fairly tame compared to previous weeks. That allowed the tech heavy Nasdaq to continue a rally to catch up with the other indexes. There is still more catchup to do as the S&P 500, Dow Jones Industrial average and Russell 2000 set new all-time highs.
After a brief test of the 21d EMA line, the Nasdaq rallied into close for a +1.05% gain on higher volume. The volume increased as the index moved up in the last 30 minutes of trading to end the day with a 100% closing range. The 73% green body is above a lower wick formed from some selling before noon. There were about the same number of advancing stocks as declining stocks.
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Tuesday, March 16, 2021
Facts: +0.09%, Volume lower, Closing range: 33%, Body: 23%
Good: Higher high, higher low, successful test of 50d MA
Bad: Low closing range, longer upper wick, could not hold morning rally
Highs/Lows: Higher high, higher low
Candle: Thin red body underneath a long upper wick
Advance/Decline: Over three declining stocks for every advancing stocks
Indexes: SPX (-0.16%), DJI (-0.39%), RUT (-1.72%), VIX (-1.20%)
Sectors: Communications (XLC +1.05%) and Technology (XLK +0.75%) were top. Industrials (XLI -1.42%) and Energy (XLE -2.85%) were bottom.
Expectation: Sideways or Lower
An attempted rally in the morning sold off as investors reacted to disappointing economic data, both for February retails sales and industrial and manufacturing production. Gains were limited to fewer stocks and dominated by mega-caps.
The Nasdaq closed with a +0.09% gain, but that was down from a 1.19% gain earlier in the day. After testing the 50d MA, the index bounced back up to close a bit below where it opened and leaving behind a 23% red body. The 33% closing range is not great, but the volume was lower than the previous day and lower than average. There were over three declining stocks for every advancing stock.
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Wednesday, March 17, 2021
Facts: +0.40%, Volume higher, Closing range: 78%, Body: 58%
Good: High closing range on slightly higher volume, support at 21d EMA
Bad: Lower high, lower low, dipped below 50d MA
Highs/Lows: Lower high, lower low
Candle: Green body covers most of candle, similar upper and lower wicks
Advance/Decline: About even advancing and declining stocks
Indexes: SPX (+0.29%), DJI (+0.58%), RUT (+0.73%), VIX (-2.83%)
Sectors: Consumer Discretionary (XLY +1.40%) and Industrials (XLI +1.15%) were top. Health (XLV -0.36%) and Utilities (XLU -1.63%) were bottom.
Expectation: Sideways or Higher
Investors got what they needed to hear from the fed's Jerome Powell. Interest rates will remain untouched and there will be no tapering of bond buying despite a big upgrade in the fed's outlook on the economy. The change in investor sentiment mid-day was clear as the indexes made a rally.
The Nasdaq closed with a +0.4% gain after dipping below the 50d MA and 21d EMA in the morning. The dip came as yields soared and investors worried about what was to come from the Fed meeting. After rallying in the afternoon, the index closed on slightly higher volume with a 78% closing range. The short upper wick above a 58% green body was formed from a small pullback just before close. There were about equal number of advancing and declining stocks.
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Thursday, March 18, 2021
Facts: -3.02%, Volume higher, Closing range: 5%, Body: 82%
Good: Nothing
Bad: Broke below 50d MA and 21d EMA, selling most of the day
Highs/Lows: Lower high, lower low
Candle: Mostly red body, with no visible lower wick
Advance/Decline: Four declining stocks for every advancing stock
Indexes: SPX (-1.48%), DJI (-0.46%), RUT (-2.94%), VIX (+12.22%)
Sectors: Financials (XLY +0.52%) was the only sector with gains. Technology (XLK -2.77%) and Energy (XLE -4.49%) were the worst performing.
Expectation: Lower
Did the market wake up with a hangover? After the positive news from the Fed caused a rally late yesterday, the market took a turn downward today. It started again with a surge in bond yields that impact the valuation of big tech and growth stocks.
The Nasdaq closed down -3.02% in a painfully red session with only a 5% closing range. The 82% red body with no visible lower wick shows the selling throughout the day. A pause at the 21d EMA could not hold and the selling regained steam into close. There were 4 declining stocks for every advancing stock.
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Friday, March 19, 2021
Facts: +0.76%, Volume higher, Closing range: 83%, Body: 45%
Good: Support at 13,000 to start morning rally
Bad: Rally lost steam in afternoon, lower high, lower low
Highs/Lows: Lower high, lower low
Candle: Thin green body with lower wick slightly longer than upper wick
Advance/Decline: One advancing stock for every declining stock
Indexes: SPX (-0.06%), DJI (-0.71%), RUT (+0.88%), VIX (-2.92%)
Sectors: Communications (XLC +0.87%) and Consumer Discretionary (XLY +0.60%) were top sectors. Financials (XLF -1.16%) and Real Estate (XLRE -1.33%) were bottom.
Expectation: Sideways
The markets ended another choppy week with one more rotation as investors continue to adjust against what's happening in the bond market. Yesterday's sale of bonds settled down and investors moved back into some growth stocks. But it was not a broad rally, with the Dow Jones Industrial and S&P 500 ending the day with losses.
The Nasdaq gained +0.76% on higher volume, but made a new low compared to the previous day and didn’t manage a new high. The closing range of 83% with a 45% green body is from a bullish intraday that testing the 13,000 area and then rallied into the afternoon. The upper wick formed from a tapering in prices after the morning rally stalled. There were more advancing stocks than declining stocks.
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The Meaning of Life (View on the Week)
This week was marked by a battle between the markets and the fed. Investors had to choose what to believe and how to respond. The week started with some nervousness on Monday morning with investors buying up defensive stocks in Utilities in the morning. By afternoon, that nervousness faded as treasury bond yields declined and confidence grew as the market rallied.
Tuesday's disappointing retail sales for February didn't seem to have an impact in the morning. Yields were lower at market open, causing Technology and Communication Services stocks to rally. However, markets faded as yields rose throughout the day. By the end of the day, there were more decliners than advancers and the Nasdaq barely held onto a gain for the day.
Wednesday was the pivotal day and could define how the market behave for the near term. The Federal Open Market Committee met to discuss the economic outlook and any changes to monetary policy. Jerome Powell spoke in early afternoon and was firm that interest rates would remain low through 2023 despite a better outlook on the economy for 2021. In addition, the Fed would continue to buy treasury bonds and mortgage-backed securities to keep borrowing costs down and investment in growth high.
Powell's statement was just what the market wanted to here and stocks rallied into the close on Wednesday. Utilities sank to the bottom of the sector list while Consumer Discretionary and Industrials soared on the enthusiasm. The VIX volatility index dropped to its lowest level since February of 2020. The rally wouldn't last long though.
Before the market opened on Thursday morning, treasury bonds sold off sharply and yields rose, bringing the yield curve to its steepest point since 2015. What was all the fuss about? Some of it could be uncertainty that remained in the bond market, maybe investors thinking Powell is underestimated or overestimated the economic rebound for 2021. Initial Jobless Claims were worse than expected, hinting toward more economic trouble New lockdowns in Europe not only hit Oil Prices and the Energy sector, but could make short and long term bonds less favorable.
The underlying tone of the steep yield curve echoes the message from Jerome Powell. There is confidence in the shorter term economic recovery, keeping short term yields low. However, by the FOMC and Powell not seeing changes in monetary policy means they still are not confident about the longer term recovery. Investors are following Powell's caution about the longer term and therefore yields are rising faster on longer term bonds.
Whatever the reasons, Thursday was marked with broad selling across every sector except Financials. The VIX soared 18% at its intraday high. Mega-caps, growth stocks, energy stocks, almost everything sold off for the day. The Nasdaq lost the 21d EMA and 50d MA lines again and rested just above the 13k area.
Friday ended with gains for the Nasdaq, but was a triple-witching day where stock options, stock index futures , and stock index option contracts all expire on the same day. That makes it tough to discern what stocks were bought on high demand or in order to fulfill expiring contracts. Investors will have to wait until Monday to find out which way the market wants to move from here.
The Nasdaq closed the week with a -0.79% decline on higher volume. The closing range of 30% shows the underlying weakness of Friday's short rally. It was good to have an upside reversal to close the week, but it wasn't enough to build confidence heading into next week.
The Nasdaq did set a higher high and a higher low than the previous week. And the high was better than the high from two weeks ago. That's good news, but the mid-week rallies could not hold the highs for any of the indexes.
The Russell 2000 (RUT) lost -2.77% for the week. The S&P 500 (SPX) ended down -0.77% and the Dow Jones Industrial average (DJI) declined -0.46%.
The VIX volatility index closed the week with a +1.26 gain.
The sectors were all over the place this week, all driven by nervousness about an overheating economy and how the fed might react.
Monday started the week with the defensive sector Utilities ( XLU ) at the top.
On Tuesday, Retail sales data for February showed the economy wasn't overheating and inflation may not be on the rise. That gave investors some confidence and despite bond yields rising, interest rate sensitive sectors such as Technology ( XLK ) and Communication Services ( XLC ) rose to the top.
After the FOMC meeting on Wednesday, Jerome Powell acknowledge the increased outlook on the economy for 2021, but made a firm statement that interest rates would not be raised and bond purchasing programs would continue. You can clearly see the spike in Technology and Communications again after 2:00p on Wednesday.
But then bond investors had their reaction on Thursday. As market open approached, bond investors sold heavily in the morning, sending yields on a surge again. Industrials ( XLI ) did well for most of the day but sold off before close. Only Financials ( XLF ) ended the day with a gain.
Finally on Friday, bond yields climbed but at a smaller rate with the yield curve flattening a bit. That allowed several sectors to find some upside. Communication Services ended the week as the top sector.
Energy ( XLE ) was the worst performing sector of the week as crude oil prices plummeted on less demand, losing over 7.5% and dragging down the Dow Jones Industrial average (DJI) with it.
Keep in mind that treasury bond yields are still not extraordinarily high. The US 30y yield and US 10y yield are returning to 2019 and early 2020 levels. But the signal to read from the chart is the yield curve. You can see the US 2y yield has barely moved in relation to the longer term yields. That means investors are seeing less risk in the short term, but more risk in the longer term.
The yield curve is at its steepest point since 2015. However, in 2015 it wasn't particularly steep. The concern though is that the trend is toward steepening, and that the only reason it hasn't accelerated further is because the fed is buying bonds to control the yield curve. If the bond buying stopped, it would cause even more volatility in both bonds and equities. The definition of "Taper Tantrum".
High Yields Corporate Bonds (HYG) and Investment Grade (LQD) corporate bond prices both declined for the week. The spread between corporate bonds and short term treasury bonds remain about the same.
The US Dollar (DXY) advanced +0.25% for the week and seems to be basing around the current support area.
Silver (SILVER) and Gold (GOLD) both advanced for a second week.
Crude Oil Futures (CRUDEOIL1!) declined sharply on fears of less demand.
Timber (WOOD) declined, but still trading near all-time highs. Copper (COPPER1!) declined while Aluminum (ALI1!) advanced, but both still showing upward trends.
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The Big Four Mega-caps
All four of the largest mega-caps declined for the week. On the weekly chart, I track against the 10 week and 40 week moving averages. Only Alphabet (GOOGL) is trading above both lines. Amazon (AMZN) is below both lines and the 10 week line is about to pass under the 40 week line. Microsoft (MSFT) moved below the 10 week line, but still trades above the 40 week line. Apple (AAPL) has been trading below the 10 week line, but above the 40 week line for the past several weeks.
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The Four Recovery Stocks
I picked four recovery stocks to track against the indexes and other indicators in this weekly report. This week, Exxon Mobil (XOM) pulled back almost 9% along with other energy stocks. Delta Airlines (DAL) also had losses for the week on fears that transportation may not rebound as quickly as previously thought. Carnival Cruise Lines (CCL) and Marriott (MAR) had gains but did not end the week with a bullish follow through.
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Investor Sentiment
The put/call ratio (PCCE) ended the week at 0.696. 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 CNN Fear & Greed index is near to the neutral territory.
The NAAIM exposure index moved up to 78.55.
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The Week Ahead
Existing Home Sales data will be released on Monday right after market open.
On Tuesday, New Home Sales data will be released. Also, API Weekly Crude Oil stock will be revealed.
Several economic news will be released on Wednesday. Durable Goods Orders for February will give a heads-up on manufacturing activity. That will be measured against Manufacturing and Services purchasing data for March which can indicate some direction on increasing or decreasing activity in these sectors. Crude Oil Inventory data will also be released.
Fed Chairman Jerome Powell is scheduled to testify before congress on Wednesday. His statements are always watched closely for possible sentiment changes. Given the situation expect him to make very measured statements on economic outlook and reaffirm that monetary policy will not change.
Thursday will bring an update on 2020 Q4 GDP numbers. Initial Jobless Claims will also be watch closely for trends in the labor market.
On Friday, the most watched data will likely be the producer price index data that will show how much cost is going into produced goods. It's typically a good early indicator on inflation, but there is enough pressure on consumer prices right now that increased costs by producers doesn't necessarily translate to consumer price increases.
Tencent Music Entertainment (TME) will release earnings on Monday.
Adobe (ADBE) will release earnings on Tuesday. Let's not fool ourselves that it actually matters, but it's still interesting that GameStop (GME) will also announce earnings on Tuesday.
Tencent (TCEHY), General Mills (GIS), RH (RH), KB Home (KBH), GrowGeneration (GRWG), and Guess (GES) are all reporting earnings on Wednesday.
For the daily/weekly update, there are no interesting earnings releases on Thursday.
On Friday, Up Fintech (TIGER) will release their earnings update.
Be sure to check your portfolio for upcoming earnings reports.
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The Bullish Side
Don't fight the fed! Jerome Powell could not have been clearer that interest rates will remain low and that bond buying programs will continue, even as the FOMC increased their outlook for the economy in 2021. Ultimately that will be good news for American individuals and companies that want to borrow money.
There is rotation from high growth stocks that were performing well in 2020 to cyclical and recovery stocks that are expected to do well in 2021. But overall money continues to pour into US equity markets from both domestic and foreign investors.
In order to buy US equities, foreign investors must first by the US Dollar which is now starting to strengthen compared to other currencies. That will attract investors back to US Dollar based instruments, including bonds as a safe haven, stabilizing yields.
US consumers will soon have stimulus checks and will start to spend no only the checks, but a record amount of savings build up during the pandemic. That will be a boon for everything from retail to leisure and travel.
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The Bearish Side
The economic recovery is looking great, but it may be better than what Jerome Powell and the FOMC is predicting. As consumers start to spend and the demand for goods and services gets ahead of the capacity and materials, that will drive up prices. That would accelerate inflation to a level that requires a response from the Fed. Any change in monetary policy will certainly be met with a reaction by the market. That may be months away, but the market is always ahead of the reality.
Treasury bond yield volatility is scaring investors. As long as yields can spike at any moment, investors will be fickle and rotations will continue to wreak havoc on equities. The volatility in both bonds and equities will have global investors looking elsewhere to find more stable and predictable returns.
Growth stocks outpaced value stocks at a historical rate in 2020. Value stocks have been catching up this year, but there is still some catch up and maybe correction before this rotation is done. b
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Key Nasdaq Levels to Watch
The Nasdaq is at a decision point right now with two key levels to watch for on the bullish and bearish side.
On the positive side, the level we want to reach is 13,620.71, but there's a few levels to pass before that happens:
- The 21d EMA is at 13,309.62. We need to get above that line and stay above it.
- The 50d MA is at 13,422.90. That's the next line to get above, stay above and eventually get the 21d EMA back above the 50d MA to signal the positive trend.
- After the 50d MA, the next line is 13,620.71 which is this past week's high. But it is also past the area of resistance that the index was rejected on 1/26, 3/2, and 3/16.
- 14,000 will be the next area of resistance.
- The all-time high is at 14,175.12. That might be a stretch to get there this week, but keep it in our sites.
On the downside, the index must stay above 12,985.05 which was a previous neck line on a head and shoulders:
- 13,000 has been an area of support on 1/29, 2/23, 3/3.
- 12,985.05 is just below that support area and a key level that would mark bearishness.
- The next support area is 12,500-12,550.
- 12,397.05 is the current bottom of the recent correction on the Nasdaq. Let's not make a new bottom.
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Wrap-up
It's tough to tell at times whether the market is correcting or rotating. Certainly, it has been a difficult several weeks for the Nasdaq as big tech and growth stocks that heavily trade on the index have not done well. But there are many reasons to believe in underlying support in US equities, but the focus is shifting among sectors and growth vs value.
The best thing to do at these times is study the stocks in your portfolio and watchlist. Because of the choppiness the last few weeks, you can learn a lot about what other investors, especially institutional investors, believe about your picks.
Look for strength against the indexes and against their sector. Pay close attention to volume on up days and down days. Is there more volume during selling or buying? How are they performing on the weekly chart vs the daily chart? Are they holding above key moving average lines (21d EMA, 50d MA, 200d MA, etc)?
Not only will that help you discover where your own investment focus should be, but it will help you identify whether the broader market is bearish or bullish, instead of worrying too much about the swings in the major indexes.
Good luck, stay healthy and trade safe!
