Last week we saw the equity market add to its slight loss for the month of December, down nearly 1.65% for the week. Most of the loss came on Wednesday with Thursday and Friday following it up with just a few additional points lost on the S&P 500 ($SPX). With that, let’s get into this week’s Technical Market Outlook….
Equity Trend
Things continue to be positive on the daily chart of the S&P; we have lost the support of the 20-day moving average but continue to stay above the 50-day and the trend line off the 2013 lows.
Equity Breadth
With the weakness in the equity market last week we saw a continued drop in market breadth. The Advance-Decline line tested has moved closer to support but remains in an up trend. JC Parets wrote a great post on his blog, All Star Charts, taking a look at breadth as well as the McCellan Osc.which is a tool used to measure the momentum of the Advance-Decline line. Check it out to get another view of market breadth.
Equity Momentum
The divergences in our three momentum indicators continued to lead the market lower. The Relative Strength Index (RSI) has yet to drop to prior support but recently has been making lower highs and lower lows. While we are still in a bullish range when it comes to momentum, things continue to look weak as buyers struggle to get their footing this month.
S&P 500 60-Minute
Last week I noted that I would be watching the 1810 level as the first potential short-term resistance on the 60-minute chart of the S&P 500 ($SPX). It seems buyers were unable to hold above that level and price headed lower. We did however close up the week with the RSI indicator above the traditional oversold level of 30 which is a positive sign. There’s not much support, but we can watch 1772.5 which is where the most recent shadows of the past few candles have hit. To see the up trend continue the 1782.5 level will need to break as buyers put in a higher high.
Volatility
The Volatility Index doesn’t get much discussion on the blog, but I do try to highlight it when we are near historical extremes. This isn’t the case this week but I still want to show the chart below, which is the ratio between the 1-month Volatility Index ($VIX) and the 3-month Volatility Index ($VXV). We can use this ratio to see where traders are placing their ‘fear’ bets, if you will. When the green histogram is rising we know that 1-month volatility is outpacing 3-month volatility as traders become more fearful of current market losses than 3 months out.
I’m not overly concerned with the relative performance as I am with the number itself. When the ratio gets above 1 the Vix ratio (i.e. its term structure) shifts from contango to backwardation (read more about the two here). As you can see from the chart below, the term structure spends most of its time in contango, with further-dated contracts trading at a premium to front-dated contracts. When things shift to backwardation we know that traders are more fearful of the present than they are of the future. As the chart shows, this often happens near short-term bottoms in the equity market. Right now we are still in contango but the premium for the 3-month Vix has been dropping as the 1-month Vix rises in relative performance.
Last Week’s Sector Performance
Last week’s sector performance was very interesting. As I mentioned in the first paragraph we closed the week in the red, however the sectors you’d expect to show strength aren’t the ones that actually did. The three strongest sectors last week were consumer discretionary (cyclicals), materials, and industrials. With health care being the laggard for the week followed by consumer staples – two defensive sectors. The selling that took place in the major indices was not severe and it did not resemble panic action, which helps explain why we didn’t see a large shift in ‘risk on’ ‘risk off’ sectors, but I’m still surprised where the strength came from last week.
Year-to-Date Sector Performance
With health care apparently taking the brunt of the selling last week we now have consumer discretionary (cyclicals) taking the lead as the strongest relative sector year-to-date.
Commodities
We didn’t discuss commodities last week so I wanted to check back in with this struggling asset class. On a relative basis with the S&P 500, the commodities tracking ETF ($DBC) is positive for December (bottom panel of the chart). There is still much work to be done for commodities to return to an up trend, but it’s taken one step in the right direction on a relative performance basis. Looking at the price action of $DBC things don’t look as good. The RSI indicator hit resistance and turned lower with price unable to hold above its 50-day moving average. It appears commodities put in yet another lower high as the down trend continues.
Major Events This Week
Financial commentary will be packed full of opinions surrounding the FOMC meeting on Wednesday and whether the Fed begins to taper it’s QE stimulus program. I personally don’t think the Fed announces the taper this month, but may provide a little more clarity to their future plans. Here’s what is scheduled to be announced this week that traders may want to keep an eye on:
Monday: Industrial Production
Tuesday: Consumer Price Index
Wednesday: Housing Starts, FOMC announcement
Thursday: Jobless Claims, Existing Home Sales
Friday: GDP
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Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.
