Market Report 3/28/16

As we head into the last week of March we are starting to see signs that the current rally off the February 11th lows might be stalling out or coming to an end.

This is going to be an interesting week as it’s also the end of the first Quarter. I mentioned in last weeks report that I thought the current run was getting long-in-the-tooth and extended. The price action last week was subdued, choppy and weak. Maybe it was because it was a Holiday shortened week but we started to see signs of weakness Friday.

The RSI on the S&P 500 poked over 70 briefly mid-week and I pointed out how that was a sign the market was “stretched”. The VIX had been also pummeled down into the 13’s which essentially meant there was no fear and a lot of complacency.

But last Thursday and especially Friday things started to turn down a bit. As I mentioned in my email last Wednesday, this seems like the first potential “shot across the bow” – a warning sign.

As I also mentioned, share buybacks will be essentially grinding to a halt as earnings season approaches and we know they are a big part of the buying pressure under the market. That’s something to keep in mind going forward, perhaps offset a bit in the coming days by end-of-quarter window dressing.

Whenever discussing the market it’s always important to note the timeframe we are dealing in. The reason I mention that is because this week could easily produce another “leg up” in the current run to eradicate the last of the “been bearish since the February lows” guys and some of the early shorts.

I posted a chart last week that showed another downward-sloping trendline and the “back to where it came from” zone. It’s not out of the realm of possibility we get a bit more continuation of this current move.

The market has a way of fooling everyone when something seems obvious. To me it seems reasonable that many might assume that the run-up may have ended last week. From the February low of 1810 to last Wednesday’s high, the SPX ran up 246 points or +13.6% in less than 30 trading sessions. That’s quite a move.

Part of it is attributed to oil rising from it’s low (on Feb 11th, the exact day the SPX hit it’s low) of 26 to 42.50. Another reason for the “little extra” likely revolved around the Fed not hiking rates.

But within days of announcing they weren’t raising rates in March, they started talking about hiking in April. All last week they were asking the question “has the Fed lost it’s credibility?”. I’m thinking yes.

When oil turns back down the market is likely to follow and that could start at any time. Almost no one believes the recent move up in oil is sustainable and based on fundamentals and that’s likely the case.

Another thing that is likely to weigh on the market in the coming weeks is declining earnings. Theoretically when all is said and done, it’s earnings that drive the market and earnings are declining.

The following comments I clipped from a CNBC article sum things up very well.

baml_comments

On Friday, when the market was closed, the 4th Quarter final GDP number was released and came in at a paltry 1.4% growth rate. That’s not exactly indicative of a robust economy and based on everything else above it’s hard to make the case for stocks to continue to rally up to new highs and beyond.

But that doesn’t’ mean it still can’t continue up a bit more from here.

What we’ve likely witnessed is a typical snap-back rally and there’s a good chance that ends soon. I’m keeping an open mind going into this week just because I can envision a scenario where they give it one last push up. Once the last of the shorts has capitulated who will be left to buy?

It will be interesting to see the end of Quarter positioning too, which could inspire the final leg of this rally before we get a pullback. There may or may not be a last leg – or we may have already seen it. It’s hard to tell.

Keep in mind that nowhere above did I say the market was set to tank or collapse. People sometimes read things in that aren’t actually said. My main point is that the current rally is likely coming to an end and we have to expect a pullback is on the horizon.

For the benefit of new members that might think I’m always bearish let me point out that I was anticipating a rally way down near the lows as I posted on this chart. Even as the market rallied up through the 50-day moving average I pointed out how it might be targeting the 200-day and a downward-sloping trendline drawn across the highs on this chart.

So last week the market essentially tagged that top trendline at Wednesday’s high and ran right into resistance. Honestly it was nothing particularly insightful on my part, just basic technical analysis. I try to be as objective as possible and keep an open mind – using basic trendlines, moving averages and indicators on the charts.

So here’s the current SPX daily chart with a few markups which I’ll discuss below.

SPX_D_3272016

First, as I pointed out last week, the RSI approaching 70 was a sign that we were closer to the top of a cycle than the bottom of one. That should be obvious.

I also pointed out how the MACD was amazingly similar to last November and once it crossed we can see that a “dip” ensued. Also note the stochastics are looking like they are about to cross down too..

So the most basic three indicators, RSI, MACD and Stochastics are lined up in a very similar fashion as they were last time the market ran-up, peaked and went into a pullback. Also note the location of the 200-day moving average at that prior inflection point and now.

Basically back then the market rolled over, sliced right through the 200-day and formed what I’d call a dip. Then it rallied right back up and formed a lower high and that’s where the downward-sloping trendline is drawn.

We may see something very similar transpire from here.

As soon as the market starts to “dip” a lot of people come out of the woodwork to call for a huge pullback or crash. But there are a lot of participants that missed the rally and are hoping for a pullback so they can buy. That’s why we get these shallow dips and rallies but the key back then was the lower high and that’s probably the thing to watch for this time around too.

Many participants have been lulled back into a sense of complacency as we’ve seen by the recent low VIX levels. Over the past six weeks we literally haven’t seen any big down days or signs of distribution and it seems like a lot of people have forgotten how ugly it was. The bearish sentiment back in January-February has all but dissipated and seems like a distant memory. But the global economy and outlook for growth isn’t much different than it was back then.

Nothing has really changed and the market is overbought and overvalued so a pullback could start at any time.

How that pullback manifests and whether there’s “one last leg up” first remains to be seen. As I said above, when something seems obvious (like the market rolling over right here) you have to at least entertain the idea it likes to confound everyone.

I think the “pain trade” is a bit more of a move higher – then a reversal.

There is a possibility that once the inevitable dip or pullback gets started it snowballs and turns into something worse. Just like this current market run-up likely exceeded what most participants envisioned, once it turns it can gather steam to the downside just as easily. But unless something comes out of the blue to cause that I would expect normal trading to resume and plenty of opportunities in select stocks.

It’s definitely a time to be selective because I don’t think we can count on an “everything goes up” type of environment from here. As I mentioned oil is likely to pull back at some point and that will take a lot of energy stocks back down. Biotech stocks had a bit of a bounce and maybe that continues but that’s certainly not the place to be in a risk-off market.

I’ll be keeping a close eye on which stocks and sectors act well this week and just keep an eye on everything for some good quick trading setups. Last week was too choppy and the volume was too low to initiate any new high confidence trades. But since we don’t have any open trades going into the week I’m anxious to get back in there and get going.

I posted a couple new ideas in the Chart Feed and once I see the open Monday and get through the show I should be able to spot more.

Tune into the live shows this week and I’ll go over the charts I see with constructive setups. When I find something that looks just right we’ll turn that into an official trade.

I’ll see you this week!