The powerful stock market gains continued last week, and even though there have only been eight trading days in the New Year, investor sentiment has seen a dramatic turn in the past five weeks. This is evident from both investor surveys and the overall the tone of the financial media.
In their December 13 survey, the American Association of Individual Investors (AAII) reported that just 20.90% of individual investors were bullish (point 2). This was down from a high of 45.66% the week of October 4 (point 1). In the December 13 report, the bearish% was 48.87%, and rose to a high of 50.3% the week of December 27 (point 3).
In last week’s survey, 38.46% are now bullish, with only 29.37% bearish. The daily chart of the S&P 500 shows that it has rallied 10.6% from the December 26 low of 2346.58. The Friday close at 2596.26 was just below the strong resistance in the 2600 area (line a). The S&P 500 has overcome the 38.2% Fibonacci resistance at 2573.61 with the 50% resistance at 2643.75.
The market’s three-week rally was pretty much what I was expecting in my December 23 article “Will There Be A Not Going Out Of Business Rally?”. Then, I said that the “rally should take the S&P 500 at least 10% higher and a 15% move is not out of the question. If the S&P 500 does reach 2350, a 10% rally would mean a move to 2585, while a 15% rally could take the S&P to 2702.”
Rallies of this magnitude are typically followed by marginal gains over the next few weeks. The Spyder Trust (SPY) reached the weekly starc- band during Christmas week, which was a sign the market was overextended on the downside. SPY has now rallied back to the resistance from the February-April 2018 lows (line a).
The rally has caused some improvement in the technical studies, as the weekly S&P 500 Advance/Decline Line did move above its WMA last week. It dropped below it during the first week of December. Based on my advance/decline analysis, the A/D Line needs to now move above the resistance (at line b) to signal that SPY is ready to make new highs.
Of the six A/D lines I monitor, only the weekly Russell 2000 and NYSE Stocks-Only A/D lines have not moved above their WMAs. Most of the short term A/D indicators that I follow have turned down from overbought levels, which increases the odds of a near term pullback.
It was a good week for all the major averages, not just the S&P 500, as the beaten-down small-cap Russell 2000 lead the way up 4.83%. It was followed by a 4.34% gain in the Dow Jones Transportation Average. The Nasdaq 100 was up 2.78% as it was boosted by the strength in the biotechnology sector.
Given the great performance in January, some investors are feeling compelled to buy ETFs or stocks now, even though earnings season is just starting this week. Do the charts of the key stocks and sectors support new buying?
The earnings calendar next week is packed with banks and other financial stocks. The weekly chart of the Financial Sector Select (XLF) shows that it has rallied from a late December low of $22.05 to close Friday at $24.50. XLF was down 13.3% in 2018, weaker than the S&P 500-tracking SPY, which was down 4.56%.
The three-week rally has taken XLF almost back to the 38.2% Fibonacci retracement resistance at $24.74. A close above this level would make the next possible upside target at $25.49. The declining 20-week EMA is now at $25.61.
The weekly relative performance (RS) has just turned down from its WMA. The downtrend in the RS confirms that XLF is weaker than the S&P 500. XLF’s weekly on-balance-volume (OBV) dropped below important support (line c) in early December warning of the plunge. It has just rebounded to its WMA but is still negative.
For those considering buying XLF where it closed at $24.50, the closest stop in my opinion would be under the January 2 low of $23.40. This would be a risk of $1.10. If XLF were to rally to the 50% resistance at $25.49 that would be a possible gain of $1.09. Risking $1.10 to make $1.09 is not a favorable risk/reward trade in my opinion.
This is the process I follow when making my own investments or when I make recommendations to my clients. Citigroup Inc. (C) reports it’s earnings before the open on Monday. Citigroup has rallied over 17% from its late December low but is still down 16.6% over the past three months.
Citigroup is still well below the 38.2% resistance at $60.08, with the declining 20-week EMA and further resistance at $61.58. The weekly RS is still well below its WMA and therefore negative. A move above its downtrend (line b) would be a sign that it is starting to lead the S&P 500. The fact that Citigroup’s OBV is also below its WMA suggest that the volume on the recent rally has not been strong. The OBV is well below its major downtrend (line c).
Wells Fargo & Company (WFC) reports before the open on Tuesday as it has rallied from the low at $43.02 to close Friday at $47.87. This is a gain of 11.2% but WFC is already getting close to major chart resistance (line d) in the $49 area. The declining 20-week EMA is at $50.82 with the 38.2% resistance at $51.24.
The RS for WFC has also turned down from its WMA consistent with a failing rally. It has even stronger resistance at the downtrend (line e). WFC’s OBV looks weaker than Citigroup’s, as it did not even come close to its declining WMA before it turned lower. Those who may be considering buying WFC at $47.87 would have to risk to under $45.41. Even if WFC were to reach the 38.2% resistance it would be a potential gain of $3.36 while risking $2.36.
Though there will hopefully be some earnings from the financial companies that are much stronger than expected, the charts reveal that many of these companies have already rebounded to strong resistance. This is a sign that their potential for further gains may be limited.
On the economic front, there was some weakening in the economic data, but nothing that was severe. This week we have the PPI and the Empire State Manufacturing Survey on Tuesday, followed on Wednesday by Retail Sales, Business Inventories and the Housing Market Index. The widely-watched Philadelphia Fed Business Survey and Housing Starts are out on Thursday, with Consumer Sentiment on Friday.
Unfortunately, Fed Chair Powell’s public remarks have increased uncertainty for investors over past few weeks. While I’m sure his intent is to create more transparency, Powell’s remarks often seem throw off the public. We might see some collateral damage this week from his remarks last week at the Economic Club of Washington. Hopefully, he will be speaking less in the future.
As noted in October (see chart), the technical outlook favored lower yields. The yield on the 10-Year T-Note dropped below support at 3.05% and dropped to a low of 2.55% early in the new year. A rebound in yields is likely over the near term, but there are no signs of a bottom.
The rally in crude oil caught many by surprise, as the March Crude oil contract rose $3.63 per barrel, 7.5% last week. This was consistent with the bullish readings after the close on January 2 (line 1).
The Herrick Payoff Index had been rising since November (line b) while prices were declining. This was a sign that money flow was improving, and the bullish divergence was confirmed when the resistance (line a) was overcome. This set up a good trading opportunity, and I will be looking to buy again on a pullback.
For those who were not in the market, I recommended a four-week dollar-cost averaging plan just before Christmas. Those who took my advice should be ready to make their fourth equal dollar purchase in a broadly based ETF like the Vanguard S&P 500 (VOO). The other three purchases were made on 12/24, 12/31 and 1/7.
For those investors who stayed long during the market decline, the rally should be an opportunity to review their holdings, as those stocks that did well before the market decline may not be the leaders in 2019. Another market decline should create a more favorable buying opportunity in select ETF’s and stocks.
In my Viper ETF Report and the Viper Hot Stocks Report, I provide my A/D line analysis twice each week with specific buy and sell advice. New subscribers receive six trading lessons for just $34.95 each per month.