Market Recap for Friday, February 16, 2018
On the surface, Friday's action didn't seem all that bad. While there was bifurcated action, three of our four major indices did finish in positive territory. The aggressive small cap Russell 2000 ($RUT) led the advance. Only the NASDAQ finished in negative territory. The benchmark S&P 500 only gained a point, but it did manage to run its winning streak of higher prices to six consecutive sessions - a period in which the S&P 500 has risen from its low of 2532 to Friday's close of 2732. That's 200 points of gains, or 8%, in just six days! What in the heck could be bearish about that, right?
Well, a couple of things. For more on this, check out the Current Outlook section below.
Defensive sectors led Friday's aborted rally attempt. Utilities (XLU, +0.89%), healthcare (XLV, +0.72%) and consumer staples (XLP, +0.40%) were the three strongest performers. Consumer discretionary (XLY, -0.48%) struggled in the second half of last week and deservedly so. The XLY has the highest SCTR score among sectors and had been very instrumental in the S&P 500's meteoric January rise. This consumer space was entitled to a relative pause and we saw it last week.
One reason for weakness in consumer discretionary on Friday was the 4.18% drop in clothing & accessories ($DJUSCF). That eliminated much of the group's week-do-date gain heading into Friday. However, the longer-term weekly chart remains very strong and any further short-term weakness could be setting up a very solid reward to risk entry into the industry group:
The rising 20 week EMA has successfully held as support several times (green arrows) during periods of weakness. I'd continue to look for resiliency and support at that key moving average on weakness.
Pre-Market Action
I'm seeing quite a bit of weakness across commodities as we begin a new trading week here in the U.S. Gold, ($GOLD), silver ($SILVER) and copper ($COPPER) are all down more than 1% this morning, although crude oil ($WTIC) is up, continuing to hold key support at $59 per barrel.
Asian markets were mostly lower overnight, while European markets are mixed this morning. Meanwhile, Wal-Mart (WMT) disappointed with their quarterly results and their outlook this morning and weakness there is pressuring the Dow Jones. Dow futures are lower by 150 points with a little more than 30 minutes left until the opening bell.
Current Outlook
I wrote about this over the weekend in my ChartWatchers article titled, "History And Fibonacci Say We Topped On Friday". A critical Fibonacci retracement level (61.8%) resides on the S&P 500 at 2742 and it was tested on Friday. Let's take a look at it:
Gap resistance is at 2741 so Friday's intraday high of 2754 was clearing a few key technical levels, but was technically-damaging because it didn't stick. Instead, we saw an intraday failure, similar to the one two weeks earlier at the 50% retracement level. That also failed with a shooting star candle. One of the most bearish short-term signals, in my view, is a long "tail" above resistance with a close below that resistance. That "false breakout" many times leads to further selling, which is exactly what I'd expect heading into this week.
This failure at the 61.8% Fibonacci retracement level is nearly identical to the one we saw in 2015 with that panicked-selling episode. That chart is in my ChartWatchers article, so if you're interested, click on the link provided above to check it out.
Sector/Industry Watch
One problem with the action late last week was the rotation of money into defensive stocks. This behavior represents profit taking in the key areas that drive equity prices higher - a short-term warning sign to me. The following is an intraday chart from last week to show how the money began rotating on Thursday away from the aggressive sectors and into more defensive-oriented sectors:
The blue directional lines show that aggressive sectors lost their relative strength late last week, while the red directional arrows show the defensive sectors gaining relative strength. The conclusion here is that although the S&P 500 printed a 6th consecutive daily gain, the character of this rally has changed and leadership among defensive sectors is not a healthy technical development. Either look for aggressive sectors to regain strength to lead a renewed effort to the upside, or consider cashing in any short-term chips and moving to cash to await what is likely to be another leg lower. How low? That would depend on a number of developments, but in particular, it would depend on the risk environment. If the Volatility Index ($VIX) quickly escalates into the 30s and 40s, we could see lower lows print. If, however, the VIX is contained in the 20s on such a drop and selling is not "violent", then I'd expect recent lows to hold and weakness to represent another great trading opportunity on the long side.
Monday Setups
For the second time in three weeks, I'm going to pass on trade setups. As I've mentioned above and in my ChartWatchers article this past weekend, I'm bullish, but I do believe we could have established a key short-term top. Entering long positions at a short-term top doesn't normally work out very well so I'll stick to a much more conservative strategy and sit in cash for now.
By the way, I don't short anything in a bull market. If you believe we're topping short-term and do like to short during such periods, by all means go right ahead. I sincerely wish you the best of luck. For me, the worst and most psychologically-damaging trade is to be short and lose money in a bull market advance. That's why I avoid shorting. I know my limitations. :-)
Historical Tendencies
February 17th through February 23rd represents the first of two weeks during the calendar year where the Russell 2000 (small caps) produces negative annualized returns for every calendar day in a 7 consecutive day period. Since 1987, this week has produced annualized returns of -43.55% on the Russell 2000. Outside of the February 17th-23rd period, however, February is typically a very good month for small cap stocks.
The only other week during the calendar year where small caps have produced negative annualized returns for 7 consecutive calendar days is from June 6th through June 12th.
Key Earnings Reports
(actual vs. estimate):
DUK: .94 vs .91
HD: 1.69 vs 1.62
MDT: 1.17 vs 1.16
WMT: 1.33 vs 1.36
(reports after close, estimate provided):
CXO: .46
DVN: .60
PSA: 2.72
VRSK: .78
Key Economic Reports
None
Happy trading!
Tom
