Complacent
The stock market ended last week with a powerful rally which was a relief to many traders. Despite the ups and downs, on a weekly basis, it was not too bad a week, as the strong Friday close helped offset the losses during the week.
Markets
The Dow averages led the gains with a 2.3% rally in the Dow Jones Utility Average, followed by a 2.2% rise in the Dow Jones Transportation Average. Even the Dow Jones Industrial Average managed a 1.8% gain after a trading range of more than 1000 points during the week.
S&P 500 Hourly
The week’s wide swings are evident in the hourly chart of the S&P 500. The S&P gained 2.38% on Monday, and, as I commented last weekend “My analysis suggests that the market is close to a short-term low”. The gains were impressive enough to convince many traders that the correction was over as only 40 of the S&P 500 stocks were lower.
The technical situation at the end of last week would normally have resulted in a 2-3 day rally, however the buying power was mostly used up by Monday’s close. As of Tuesday, it was my view that the late-day decline and close below Monday’s open of the Invesco QQQ Trust (QQQ)
From Tuesday’s QQQ close at $318.40, it dropped to a low of $297.45 by early Friday, which was a decline of 6.6%. Even with the 1.6% gain on Friday, the $NDX was still down 1.9% for the week.
QQQ
Last week the QQQ dropped below its weekly starc- band, correcting just over 13% from the February 16 high at $338.19 to Friday’s low at $297.45. The Friday close was back above its 20-week exponential moving average (EMA) at $307.96, which is a good sign. There is next weekly support in the $292-$294 area, with further support in the $281-area (line a).
The weekly Nasdaq 100 Advance/Decline line closed below its weighted moving average (WMA) for the first time since April 17, 2020. The A/D line has next good support at the October high (line b), which could be tested before the correction is over. The volume has been heavy over the past two weeks. The weekly On Balance Volume (OBV), which dropped below its WMA on February 19, has now broken the longer term support (line c). A rebound back to this level, now functioning as resistance, would not be surprising, but the OBV is quite a ways from turning positive.
Growth – Value
The sharp selling in the technology sector is consistent with the completion of a top in the Growth (IWF)
I have been discussing this ratio chart since last October, as it approached its peak in November. When the ratio is rising, as it has been since 2008, it favors growth over value. This tide now appears to have changed, as the support from May 2020 (line a) was broken two weeks ago (point b).
The Moving Average Convergence-Divergence (MACD) Histogram peaked in May, but diverged (line d) as the ratio was making its high. This was a negative divergence that was supported in September when the Histogram dropped below the zero line. The MACD line dropped below the signal line at the same time (point c). Both are still negative and declining. A rebound is likely sometime this year which should be another opportunity to buy value.
In late January, I focused on food inflation and what I thought was a high degree of complacency amongst both investors and traders. Of course, inflation has become more of an issue in the past few weeks, as interest rates have surged along with commodity prices.
Complacency, as per one dictionary’s definition, is “marked by self-satisfaction especially when accompanied by unawareness of actual dangers or deficiencies.” In the past six weeks, I have noticed that the complacency level has remained high, as many seem to believe that stocks only go up. This was also the case in January of 2018 and January 2020. My observations were corroborated by option data that indicates historic levels of call buying by smaller speculators.
Many of the relatively-new traders that have entered the market during the pandemic still have a number of misconceptions about stocks and the stock market. The failure of many large tech companies to move higher after strong earnings was a shock to many. In my decades of teaching technical analysis and writing about the stock market, the most foundational and oft-repeated message I give students and readers is that stocks do not always go up or go down.
So has the stock market decline lasted long enough and dropped far enough? In the latest survey by the American Association of Individual Investors (AAII), the Bullish% declined 5.6 points to 40.3%. It is still above the long-term average of 38%, and would typically be lower at the end of a correction. The very low cash position of professional managers and high commitment to equities has likely not changed substantially from last month.
IWM Daily
Looking at the daily chart of the small cap iShares Russell 2000 (IWM)
The Russell 2000 A/D line has performed much better than the Nasdaq 100 A/D line, closing Friday back just above its WMA, instead of below. There is strong A/D line support going back to November 2020 (line c). The OBV peaked in early December, and diverged from prices as it formed a lower high in February (line d). In late February it dropped below the late January lows (line e) and is still well below its declining WMA.
I will be watching this week’s action closely, with special attention to the Advance/Decline numbers. I expect the market to have more swings up and down in the second quarter, as there are likely to be more disappointment to those who chase prices and ignore the risk. Final passage of the new COVID-19 relief bill could boost stocks early in the week, but it’s possible that this has already been partially factored in by traders and investors.
In the Viper ETF Report and Viper Hot Stocks Report, I update subscribers with market analysis at least twice each week and provide specific buy and sell advice. Each report is just $34.95 per month. New subscribers also receive six free trading lessons, a $49 value.
