Dramatic Reversal!

January 17, 2018.

Dramatic Reversal!

After movement that was one-directional over the last few weeks, a dramatic reversal yesterday signaled the possibility that there could be further weakness along the way. Wall Street took a pause mid-rally, recording losses, weighed down by noticeable weakness in the stock of General Electric (GE) and a decline in the price of crude which sent the energy sector lower. The stock market opened the shortened trading week at an impressive gap-up, the S&P 500, concomitantly succeeding for the first time in breaking up the 2,800 round number! It took very little time, though, for the market to start losing altitude, closing the gap and continuing to fall, the index closing near its daily low.

The jump at the beginning of trading yesterday signaled to many investors that the market is getting ahead of itself and that it’s trading at extreme levels that are just too high. The healthiest move on the part of the market now would be to see it fall to a certain degree over the next few trading days. The S&P 500 ended with a Dark Cloud Cover pattern, a bearish Japanese candle pattern. Some sectors and indexes also ended with a more bearish pattern called an Engulfing pattern. An Engulfing pattern is when a sector or index opens above the high attained on the previous trading day but then closes beneath the previous low. Take for example the small stock index, the Russell 2000 (IWM) which closed to the tune of a bearish Engulfing pattern.

The market is still traded at the top edge of its upward price channel, about 5% above its 50-period EMA. These areas are where the market tends to halt and digest prices, consolidating and taking a breath. The S&P 500 is up about 4% year-to-date. That being the case, the tiredness is palpable. It’s perfectly natural for the market to be exhausted after such a fast sprint.

The energy sector (XLE) fell 1.2%, followed by the industrial sector (XLI) and the materials sector (XLB), which recorded substantial weakness, falling 0.9% and 1.2% respectively.

Energy stocks dragged Wall Street down slightly, but investors are continuing to move more and more in the direction of the stock market, seeing that yields have been to their liking. This is a self-perpetuating process – enticing more and more investors.

Daily Summary: The Dow Jones ended negligibly off by 0.04%. The S&P 500 fell 0.35%. The NASDAQ shed 0.51%.

Earlier in the course of the trading day, the Dow Jones broke up the 26,000 point level for the first time ever, the Q4 earnings season opening strongly, and riding the wave of positive results from United Health (UNH) and Citigroup (C).

As of now, over 75% of the 30 companies on the S&P 500 reporting have beaten out earnings forecasts.

One of the stocks that stood out yesterday was the pharmaceutical company, Merck (MRK), which soared 5.9% after the initial results of a key study showed that its blockbuster drug, Keytruda and two other chemotherapy drugs helped lung cancer patients lengthen their lives and halt the progression of the disease.

Viacom (VIAB) fell 7% after a report was released that CBS is not actively seeking to merge with it.

On the S&P 500, 170 stocks rose to new 52-week highs, 6 dipping to new yearly lows; on the NASDAQ, 243 stocks recorded new 52-week highs, 29 falling to new yearly lows.

About 8.3 billion shares changed hands on U.S. exchanges, compared to the 6.48 billion average over     the last 20 trading days.

Wednesday: A number of economic reports will be released today, including industrial output at 9:15 N.Y. time and the home contractor survey at 10:00. The Federal Reserve is expected to release its Beige Book on the economy at 14:00, an event that usually causes increased volatility in the last few trading hours.

Investors, today, will also keep a watchful eye on the Bank of Canada which is expected to hike rates. Yesterday, the dollar fell in currency markets, shedding already 1.8% of its value year-to-date. The dollar traded against the backdrop of expectations of monetary tightening in other banks. At the same time, our forecast is that the dollar will see a rebound in the first half of this trading year, given expectations for Fed rate hikes. Likewise, in light of the latest tax reform, firms’ repatriation of moneys held overseas is expectation to increase dollar demand, and support further strengthening.

Before opening, a number of additional reports are expected from large banks, including GS and BAC.

Wednesday’s Hot Stocks: JUNO, ADNT, CSX, IBKR

IPOs: None

Have a great trading day!

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