After rising into Friday, stocks started a very important earnings weak to the downside. Sluggish futures led to an early bounce, but that was sold into midmorning. Stocks rallied back into early afternoon, set up for a move higher, but then the bids failed and stocks dropped below the morning low and closed out near session lows. All indices lost ground.
SP500 -19.34, -0.67%
NASDAQ -39.26, -0.52%
DJ30 -177.23, -0.67%
SP400 -0.83%
RUTX -0.62%
SOX -0.21%
VOUME: NYSE +3%, NASDAQ +2%. Not huge surges in volume on the downside as NYSE moved up just to average while NASDAQ held above average again and rose modestly as well. Not a huge distribution session but a distribution session nonetheless.
ADVANCE/DECLINE: NYSE -4.5:1, NASDAQ -2.2:1. Hmm, sure looks as if breadth is also indicating some problems with the move higher, i.e. narrow on the climb, expanding as the indices sell.
The index charts do not show the ugly kind of reversals seen two times earlier in January, instead sliding back from the new highs notched by SP500, DJ30, NASDAQ. SOX was actually quite decent, testing the 10 day EMA on the low and rebounding. RUTX posted a quite orderly test toward the 10 day EMA. SP400 was the dog at -0.83% and plunking the 10 day EMA on the close. The dog yes, but still in the uptrend along the 10 day EMA.
So, the indices lost ground, but in price terms it was not a major clubbing. There was, however, an uptick in volume on both NYSE and NASDAQ. Not an explosive volume surge, but once again there was a distribution session. During this 4 week run (19 trading sessions) that makes four higher volume downside sessions, the most dramatic on 1/16 and again on 1/24, both sessions gapping upside then reversing on strong trade. The first such session from 1/9 was problematic. The last three occurred in a 10 session span with the last two separated by just 2 trading sessions. Another such session Tuesday or Wednesday and you see a pattern of bigger money selling, and that typically leads to some sort of pullback and perhaps, oh my, even a correction.
That dovetails with some other indicators discussed the past few weeks, e.g. record bullishness in advisors coupled with a 30 year low in bearish advisors, technically extended SP500 and DJ30 in terms of rotations higher over the last 50 day MA test and in terms of percentage above the 200 day SMA.
Volatility is another factor discussed as recently as the weekend report. It had not risen with the market price rise, indicating that any pullback would likely be just a pullback or correction, not major market top. That still remains the case Monday, but note that volatility spiked 25% on VIX and 10% on VXN (NASDAQ volatility). Of course Monday was not an upside session so the volatility more coincides with the selling versus a ramp higher.
Compared to the losses on the session, however, the VIX move was incongruent. It was MUCH stronger than the market losses. Meaning? While the action in VIX does not necessarily foretell a serious market top, it shows there could be a pretty good correction, a long coming correction (I prefer that phrase to the hated 'a needed correction' -- who exactly needed it?). In other words, volatility jumped so markedly on such a modest move it shows there is a lot of anxiety in the market ready to 'sell Moritmer, sell!' (from . . . 'Trading Places.').
Thus, we are willing to let positions work some more up to the key earnings starting with FB 1/31 (Wednesday) after the close and getting very serious Thursday with results from AAPL, AMZN, and GOOG. At that point, the final cog may fall into place: leadership starting to break lower. Everything else is pretty much in place. Some more distribution and then leaders breaking bad would be the correction signal.
Of course that assumes the leaders start to break down or reverse breakouts. We can let some parts of positions work through earnings and see if there is a surge that holds or one that surges and then rolls over. Given what is falling in place with other indicators, that means lightening up even more ahead of results and then have a bit still on the table to take part in further upside if it comes and not get hammered if it does not. Or not. There is nothing wrong with getting out, preserving gain, and letting whatever sets up, upside or downside, set up after earnings.
We did bank some NVDA, CVX, and PII. NVDA was moving up and hit the target. PII has earnings pre-market and while it can rally we decided it was best to take the gain halfway to the target. CVX broke the 20 day EMA and we took the rest.
There were upside plays making moves. I know some think it incongruent, but as we took some NVDA gain from one position we bought some more NVDA on its new break higher. We picked up some ARRY and QUIK on good moves from good setups. We did the same with GOOG, but the nice breakout early turned cold and it closed flat.
NFLX is still surging. AMZN put in a new high though it closed off the high some. FB and AAPL are stumbling into results. China stocks are having issues outside BABA. Manufacturing is coming back some but not rolling over as of yet. Financial is still solid -- already past earnings. Retail overall good, drugs very good. There is leadership still moving up, overall leadership is not rolling over, but a very important test is coming in the earnings.
Why are earnings so critical, more so this time? Because last season broke key leaders out of bases and triggered the November to present rally. Many of those stocks are quite extended near term, e.g. AMZN, having posted tremendous runs from earnings (AMZN 47%, GOOG 22%, MSFT 22%). It will be difficult to announce results and guidance such that these stocks can make a sustained move in that ball park again from where they are now. Thus, with the other indications such as extreme sentiment, ramping volatility on modest selling, technically extended indices and stocks (at least near term), these earnings may be the last hurrah for the current move. Sure there may be a jump on the results, but the staying power is questionable.
Have a great evening!
Jon Johnson, Chief Market Strategist
InvestmentHouse.com
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