February 5, 2018.
For most of January, the market stubbornly moved in one direction, up! The market barely even saw the slightest downtick in intraday trading, corrections disappearing before they could even gain any traction. It seemed artificial part of the time, but when the computers are on a buying spree, the bulls have little to complain about.
The S&P 500 fell 2.15% on Friday, suffering its sharpest and most damaging losses since June 24, 2016, when it toppled 3.6% on one day after Britain’s Brexit vote. It happened gradually this past week, but the character of the market has changed enough to place the strong uptrend under pressure, piquing significant concern that the market has already begun the process of peaking.
The declines, though, were more pronounced on Friday, correction buyers nowhere to be found and concerns about higher interest rates receiving more and more legitimacy. The good news is that the technical state of overbought levels is already no longer a matter of concern. At the same time, the question now is whether selling will garner more negative momentum. Negative momentum has been a very rare occurrence in this market for quite some time. In effect, since November ’16, all of the large declines were followed up by sharp gains.
It’s important to remember that markets don’t decline in the same manner that they rise. Declines usually strike quicker. They sweep through the market, engulfing many sectors. Even “good stocks” suffer when the market corrects, the objective of market players being to simply flee for their lives rather than selectively opt for one sector over the other.
Sharp declines tend to lead to renewed surges in the market. In effect, we’ll find that almost all of the strongest positive days came on the heels of days that saw large declines. There’s a high probability that Friday’s strong declines will spark strong gains, but as of now, we can’t forget that the market went into freefall – and that trying to catch a falling knife is a dangerous pursuit.
There are three factors at play that are causing problems in the market as of now:
Firstly, the indexes have reached extreme technical levels after having risen on a beeline since the beginning of the year. Until last week, we had seen unfaltering upward movement, the market on a rampage, setting one historic high after another. When stocks, or the market for that matter, rises without pause, one of the negative factors is that no pockets of support are created. That being the case, when a price correction starts developing, the drop can be very sharp.
If you take a glimpse at the market at the present time, the S&P 500 doesn’t really have a support base going all the way down to the high achieved in December. That doesn’t mean that the market will fall all the way until there, but it certainly does raise the chances of a deep correction, the indexes now looking for support.
The second factor that the market is grappling with now is connected to the first. The strong movement over the last month created a dynamic of “selling the news.” Even if the numbers a company reports are stellar, the numbers were already anticipated – and were thus already priced into the stock’s market valuation. When a company reports strong numbers, investors’ inclination to sell and lock in profits will be much more pronounced than trying to chase a company’s stock in the hopes of finding a bargain price.
We saw the phenomenon of “selling the news” a number of times during the earnings season with names from the semiconductor industry like Lam Research (LRCX) and Intel (INTC). Despite very good earnings reports, these stocks didn’t succeed in producing momentum even though analysts were bullish on them.
The third factor of note is particularly bothersome, i.e. bond yields. Bond yields rising, concern about inflation has become more and more palpable. And that’s all the more so after Friday’s employment report pointed to a 0.3% rise in average wages. The bears for a long time already have prophesized that the catalyst for the market peaking will be a rate hike. They had been horribly off for many years, but now certain signals have appeared that these concerns are going to slow down the market.
The main charts worth following are the Barclays ETF, the IEF, which tracks governmental bond yields for 7-10 year bonds, and another ETF from Barclay’s, the TLT, which tracks government bonds for 20 years and up. On Friday, the IEF fell to its lowest level since 2014 which causes fear among market players. The U.S. government is offering bond yields that are already nearing 3% a year, i.e. significant competition as far as stocks go.
Even though the market declines have been grave and the rise in bond yields is a reason for worry, I am not convinced that what we’re seeing now is anything more than a correction that should have reared its head a long time ago. The indexes will need to fall a lot more before they can test the long-term uptrend line. Even though that’s a reasonable possibility, I expect to see more large and healthy surges in the market before that becomes an issue.
As traders, days like Friday are not a bad thing. That’s right! It hurts those who are at a long in their portfolios, but on the flipside, it significantly raises the potential for solid opportunities from hereon in. The market – notable as the meeting place of players’ supply and demand – seems to have been “manipulated” in January by preprogrammed computerized algorithmic programs with little regard for actual underlying value.
Now we have to think about our game plan for this week. Don’t look to be dogmatically bullish or bearish. You have to be ready for movement in both directions and understand how you’ll respond in the face of either eventuality.
In Summary: The correction that everybody had anticipated for so long finally surfaced. There’s no reason to believe, though, that the coming period will be marked by suffering and despair. Stay positive and seek out opportunities. Losing days are a wonderful time for putting together your wish list of new stocks to buy!
Have a great trading week!
|Monday||9:45||PMI Services Index||53.3||Medium|
|Monday||10:00||ISM Non-Mfg Index||56.2||Medium|
|Wednesday||8:30||William Dudley Speaks||–||Medium|
|Wednesday||10:30||Oil Inventories||6.8 M barrels||Low|
|Thursday||10:00||Chain Store Sales|
|Thursday||8:30||Jobless Claims||235 K||Medium|
|Friday||8:30||Wholesale Trade||0.2 %||Medium|
Today’s Picks – Day Trading!
New York Strategy Swing
Today’s Picks – Swing “New-York Strategy”
No.1 – KNX
|Company Name||Knight-Swift Transportation Holdings|
|Sector||Services | Trucking|
Risk Rates: Normal – Regular size, High –Consider reducing size, Low – Consider increasing size