Stocks ended weaker last week and closed below important near-term support (50-day moving average line) as the market continues to digest the very strong post-election rally. Last week was the first time we saw all of the major indices break down and close below their respective 50 DMA lines since the election which is not a good sign for the bulls. Remember that, in and of itself this is not the end of the world, but if the bulls do not show up quickly and quell the bearish selling, then lower prices will follow.
As we have told you for the past month, defense is king as more and more important areas begin breaking down. The first “tell” that something was awry was the Russell 2000. It led on the way up after the election and then “stalled” in December and has been moving sideways since. Other macro markets also retraced most, if not all, of their post-election move (Gold, Silver, Mexican Peso, just to name a few). While that was happening, the other popular indices edged higher but one-by-one several important sectors stalled out and began to fall. As mentioned in prior reports, some of them are: Transports (IYT), Steel (SLX), Materials (XLB), Industrials (XLI), & Retail (XRT). Then, we saw the all-important Financials (XLF) and Semiconductor (SMH) stocks breakdown in recent days and that tipped the market to a much more defense stance. Moreover, as money was flowing out of equities we saw it flow into metals (gold and silver) and other safe-haven assets.
For now, defense is still king until we see the market “bounce.” If the market can’t bounce and instead continues to fall, then odds favor we will see a deeper 5-10% pullback develop. The important levels of support to watch are: Russel 2000: 1335, then 1308, Dow Industrials: 20.4k, then 20.1k, S&P 500: 2322.25, then 2300, Nasdaq Composite: 5769.39, then 5669.
A Closer Look at What Happened Last Week…
Mon-Wed Action:
Stocks closed a little higher on Monday as earnings season officially began and geopolitical tensions remained elevated. Gold and Silver rallied all week as investors dumped stocks and moved into safe-haven assets.
Stocks fell on Tuesday as geopolitical tensions remained elevated. The Dow transports fell after shares of United Continental tanked after a passenger was dragged off an overbooked flight. Secretary of State Rex Tillerson said the U.S. will stand up against anyone who commits crimes against humanity.
Separately, President Trump tweeted and said…
Stocks fell again on Wednesday after the greenback tumbled. The U.S. dollar fell hard after President Donald Trump told the Wall Street Journal he thought the currency was getting “too strong.” The dollar index, which tracks the greenback’s performance against six major currencies, fell to the lowest level in a month after Trump’s comments.
Thur & Fri Action:
Stocks fell hard on Thursday causing all of the major indices to slice, and close, below their respective 50 day moving average lines. Stocks fell and gold/silver soared after the U.S. dropped “the mother of all bombs” in Afghanistan to fight ISIS. Elsewhere, earnings season has been anticipated as a potential positive catalyst for stocks. So far, analysts believe earnings will grow 10.4% in Q1 2017 vs Q1 2016. According to Thomson Reuters, that is a little better than the 10.3% in the third quarter of 2014, and the best since the 18% growth experienced in the third quarter, 2011. Meanwhile, revenues are expected to grow by more than 7%, also the best since 2011. On Friday, stocks were closed for the holiday but tension continued to grow with North Korea.
Market Outlook: Market Breaks 50 DMA Line
The market is pulling back after a very strong post-election rally. As always, keep your losses small and never argue with the tape.
