Market Alert - The Close

The Executive Order Disorder hit the stock market to start the week and start the end of January. The immigration EO received most of the attention and all of the furor, but the possibility of protectionist actions such as a border tax (discussed before as mostly a tax on US consumers as Canada's GST is on its citizens), the fear of curtailing Hb-1 visas, and the rumor that tax cuts may not occur until 2018 all combined to snuff out optimism, at least for the day, that markets can continue to rise.

SP500 -13.79, -0.60%
NASDAQ -47.07, -0.83%
DJ30 -122.65, -0.61%
SP400 -0.83%
RUTX =1.34%
SOX -0.56%

In the end, the only substantive news pertained to immigration, and the EO was really nothing more than what Carter, Reagan, Clinton and Obama all did before. The market reaction thus would appear to be an overreaction, but then again, the post-election rally was on the promise of action versus actual action. Thus, while you can rationalize that the market was just in a knee-jerk denial mood due to appearances versus realities, the reality is that as of yet, despite some EO's, no economic policies have been enacted.

The 'why' is important, but the 'what,' as in what happened, is more so. One of the major concerns I voiced when the indices broke to higher highs last Wednesday was whether the breakout would stick, particularly given the two 60+% bullish sentiment readings over the past month.

The breakouts were given back in several cases. SP500 gapped through the Wednesday upside gap. It recovered off the low and breach of the 2016 trendline, so some support held. DJ30 showed similar issues, gapping lower, filling the Wednesday gap, recovering off a 20 day EMA test to hold the 10 day EMA.

NASDAQ gapped lower, filled the Wednesday gap with a reach below the 10 day EMA, but it recovered to hold the 10 day as well. SOX? It wondered what the fuss was about, testing the 10 day EMA on the low, recovering much of the loss.

RUTX and SP400 struggled though also bounced off the low. SP400 tested the 50 day SMA and the bottom of its range, then reversed to hold the 20 day on the close. RUTX sold to the 50 day EMA then recovered to hold its December to January range.

Okay, they held the ranges and that is good. Perhaps they will simply overcome a beating on the news of an immigration pause to a quite small number of people (the 109 people detained over the weekend -- who were all released as of last night -- were just a small part of the 325+K who entered the US this weekend) and worries and rumors of putting off tax cuts, etc. Holding near support definitely left them in position to do so.

It is important, however, not to assume that will be the case even with still good-looking leadership (even if bruised a bit Monday). The bias has been upside even in the absence of enough buyers to break the market higher, but the important point is, after the breakout occurred, the indices WERE SUSCEPTIBLE to this kind of story and rumor to the extent they punted the breakout. If there is no quick rebound to shake it off, the market is showing its vulnerability to a deeper correction.

Oil and airlines were under some more serious pressure than the rest of the market and we closed a trio of oil plays. Other positions held support and rebounded or otherwise showed merit, so we left them to work. If they cannot show some upside strength, however, prudence likely suggests we close more.

Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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