Weekly Technical Market Outlook 2/3/2014

While the bulls crushed it for what feels like every trading session in 2013, they weren’t able to hold strong to start off 2014. For the S&P 500, January finished down 3.56%, the Dow  finished the month 5.6% lower, Nasdaq was down 1.74%, and small caps dropped 2.77%. Last week I wrote a post about the important level in equities to be watching right now as it pertains to historical returns. The Dow closed out trading on Friday just barely under the support level I highlighted. We’ll see if things continue to weaken this year or if buyers are able to step up and continue to defend support.

Equity Trend

Last week we broke through the 12-month trend line but traders then began keeping the price of the S&P 500 ($SPX) in a fairly tight consolidation above the 100-day moving average (blue line). Price for equities sits just at the previous December low as a break of the 100-MA would trigger a lower low and be a potential trend change. However, as I’ll discuss later, I think sentiment towards stocks has shifted too far too fast in order to see continued strength in selling. But we’ll see.

Equity and Treasury Relationship

The green line in the chart below shows the relative performance between the S&P 500 ($SPX) and 10-year Treasury bonds ($UST). As the line rises, we know that stocks are outpacing bonds and visa versa when the line heads lower. Late last year the ratio between these two asset classes finally broke above its 2007 high, which while it may seem interesting, isn’t what’s important about this chart.

What’s important is when this relationship begins to diverge from the price of equities. This has happened twice in the last seven years – at the 2007 and 2011 highs. In 2007 we had stocks begin to under perform Treasury’s while the S&P continued to hit a new high. In ’11 we did not see a lower high in the ratio between $SPX and $UST but it did not confirm the move that was taking place in $SPX alone. As the chart shows, both instances lead to lower prices in the stock market, albeit at a different severity.

As the green line drops back below the 2007 high, what I’ll be watching closely on the weekly chart is if buyers come back into the equity market and test (or break) the previous high in price but of the stock-bond relationship does not provide confirmation then if history is any indication – we may be in trouble. However, we may very well see a confirmation of a tested or new high – we’ll let price lead the way.

Equity Breadth

Like price, we saw breadth begin to consolidate after the sharp drop. The Advance-Decline Line is still in an uptrend as it has yet to break below it’s December low. The Percentage of Stocks Above Their 200-Day Moving Averages, while weak, is still above its rising trend line. If we get continued selling this week then there’s a chance we see the Percentage of Stocks Above 200-MA test or break the trend line which will likely be a large chink in the armor of the (so far) bullish outlook in equity breadth.

Equity Momentum

In last week’s Technical Market Outlook I noted the importance of the Relative Strength Index (RSI) holding above previous support as it maintains its bullish range. While price consolidated we did see the RSI indicator hold above 35. The MACD momentum indicator continued to weaken last week putting in a lower low. The Money Flow Indicator held up well as it continues to stay above its December low – a sign that selling volume may not have been all that strong last week.Sentiment

CNN has created an interesting tool to measure sentiment, they call it their Fear & Greed indicator. The measure takes into account stock price strength (# of 52 week highs), breadth (McClellan Summation Index), demand for junk bonds (spread between investment grade and junk), momentum (% above 125-day MA), option activity (put/call ratio), volatility ($VIX above or below 50-MA), and safe haven demand (stocks vs. bonds). Of these seven measurements, 5 of them are registering “extreme fear” according to the analysis by CNN; with the first two showing “fear”.

The chart below shows the composite of the seven indicators, and s you can see we are currently near historical lows in sentiment.

S&P 500 60-Minute

The short-term view of the S&P 500 ($SPX) shows some positive divergences in both the RSI and MACD indicators. As price sits in a tight range, both momentum indicators began to make higher lows  which gives us a clue that the directional pull by momentum may lead to higher prices in the equity market. I’ll be watching resistance at 1800 if bulls take control with 1770 being the level of support to keep the long-term up trend intact.

Last Week’s Sector Performance

Once again utilities ($XLU) showed the strongest performance of the nine S&P sectors. While being the second-strongest sector the previous week, consumer staples ($XLP) took it on the chin last week being the weakest performer.

Year-to-Date Sector Performance

We didn’t see much change from last week’s Technical Market Outlook for the YTD sector performance. Like the weekly chart above, utilities ($XLU) continue to lead for 2014 with consumer discretionary (cyclicals) ($XLY) holding up the rear as the weakest S&P sector.

Major Events This Week

As with most first week’s of the month, the focus will be on Friday’s payroll data. Specifically traders will likely be interested in whether the labor participation rate continued to drop in January and its impact on the overall unemployment rate.

Monday: Motor Vehicle Sales, Construction Spending, and the ISM Manufacturing Index
Tuesday: Factory Orders
Wednesday: ISM Non-Manufacturing Index
Thursday: Jobless Claims
Friday: Non-Farm Payroll Report

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.