Market Week In Review - 2/1/2021 - 2/5/2021
The Market Week in Review is my weekend homework where I look over what happened in the previous week and what might come in the next week. It helps me evaluate my observations, recognize new data points, and create a plan for possible scenarios in the future.
I do occasionally have some errors or typos and will correct them in my blog or in the comments on TradingView. I do not have an editor and do this in my free time.
If you find this helpful, please let me know in the comments. I am also more than happy to add new perspectives and data points if you have ideas.
The structure is the following:
If you have been following my daily updates, you can skip down to the “The Meaning of Life”. If not, then this first part is a great play-by-play recap for the week. Click the original charts for more detail each day.
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Monday, February 1, 2021
Facts: +2.55%, Volume lower, Closing range: 91%, Body: 59%
Good: Close back above the 21d EMA, steady climb after morning dip
Bad: Nothing
Highs/Lows: Higher high, higher low
Candle: Thick green body with longer lower wick
Advance/Decline: 3.19, three advancing stocks for every declining stock
Indexes: SPX (+1.61%), DJI (+0.76%), RUT (+2.53%), VIX (-8.61%)
Sectors: Consumer Discretionary (XLY +2.60%) and Technology (XLK +2.51%) were top. Consumer Staples (XLP +0.09%) and Health Services (XLV +0.38%) were bottom.
Expectation: Sideways or Higher
February kicked off with broad gains across the Nasdaq. The index took a short dip in the morning and then headed upward for the rest of the day. Manufacturing data released after market open was a little lower than analyst expectations, but still high compared to the two-year monthly average.
The Nasdaq closed the day with a +2.55% gain on lower volume. The closing range of 91% and the 59% green body show the strong buying that occurred throughout the day after a morning dip. The index closed above the 21d EMA, a key area of support. Many participants benefited from the gains as there were three advancing stocks for every declining stock.
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Tuesday, February 2, 2021
Facts: +1.56%, Volume higher, Closing range: 82% (with gap), Body: 60%
Good: Solid gains throughout the morning and early afternoon.
Bad: Slight fade in late afternoon
Highs/Lows: Higher high, higher low
Candle: Gap up, thick green body with small upper wick from fade
Advance/Decline: 2.81, almost three advancing stocks for every declining stock
Indexes: SPX (+1.39%), DJI (+1.57%), RUT (+1.19%), VIX (-15.48%)
Sectors: Financials (XLF +2.42%) and Consumer Discretionary (XLY +2.12%) were top. Real Estate (XLRE +0.43%) and Health Services (XLV +0.29%) were bottom.
Expectation: Higher
The market added to Monday's gains with another positive day on Tuesday. Volatility fell back to more stable levels while gains continued to be spread broadly across stocks. The market faded slightly going into close, possibly as investors prepared for earnings reports from Amazon (AMZN) and Alphabet (GOOGL).
The Nasdaq closed the day with a +1.56% gain on higher volume. The closing range with the gap was 82% and a 60% green body sits under a short upper wick created by the late afternoon fade. The rising window candle indicates a bullish continuation, but with some caution given the fade into close. Almost three stocks advanced for each declining stock, the second day of broad advances.
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Wednesday, February 3, 2021
Facts: -0.02%, Volume higher, Closing range: 18%, Body: 78%
Good: Higher high, higher low, held support above morning low
Bad: Sell off late afternoon
Highs/Lows: Higher high, higher low
Candle: Mostly red body formed from morning and afternoon dips
Advance/Decline: 1.65, almost three advancing stocks for every two declining stocks
Indexes: SPX (+0.10%), DJI (+0.12%), RUT (+0.38%), VIX (-10.37%)
Sectors: Energy (XLE +4.27%) and Communications (XLC +1.34%)were top. Consumer Discretionary (XLY -0.56%) and Health Services (XLV +0.29%) were bottom.
Expectation: Sideways or Lower
The Nasdaq paused today after two days of big gains. It made two attempts to have another day of gains, but dipped in morning and late afternoon trading. Still there were advances across a large number of stocks, fueled by great earnings reports from big mega-caps the day before.
The Nasdaq closed with a -0.02% loss, moving sideways after gaining over 4% the past two days. Volume was slightly higher than the previous days. The closing range of 18% and a red body of 78% are the result of the morning and late-afternoon dips. Overall, the candle presents bearish, so expectations are set for sideways or lower. Advancing stocks did outnumber declining stocks on a 3 to 2 ratio.
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Thursday, February 4, 2021
Facts: +1.23%, Volume lower, Closing range: 100%, Body: 71%
Good: Constant gain after morning dip, new all-time high
Bad: Nothing
Highs/Lows: Higher high, higher low
Candle: Mostly green body with short lower wick, no upper wick
Advance/Decline: 2.70, More than two advancing stocks for every declining stock
Indexes: SPX (+1.09%), DJI (+1.08%), RUT (+1.98%), VIX (-4.98%)
Sectors: Financials (XLF +2.22%) and Technology (XLK +1.60%) were top. Materials (XLB -0.36%) was the only sector to lose for the day.
Expectation: Higher
A positive expectation breaker is always welcome in the Daily Market Update. Despite yesterday's candle showing some bearish indication, today the Nasdaq proved it wasn't ready to move back down. A new all-time high adds to the string of higher highs and higher lows we've had all week.
The index closed with a +1.23% gain. Volume was lower than the previous day but continues to be higher than the 50d moving average volume. The candle has a closing range of 100% created by a spike in prices in the last 10 minutes of trading. The short lower wick was created in a 30 minute window of volatility in the morning. There were more than two advancing stocks for every declining stock.
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Friday, February 5, 2021
Facts: +0.57%, Volume lower, Closing range: 81%, Body: 27%
Good: New all-time high, not overly heated gain
Bad: Some pullback in the afternoon
Highs/Lows: Higher high, higher low
Candle: Thin body in upper half of the candle, longer lower wick from morning dip.
Advance/Decline: 1.95, two advancing stocks for every declining stock
Indexes: SPX (+0.39%), DJI (+0.30%), RUT (+1.40%), VIX (-4.13%)
Sectors: Materials (XLB +1.72%) and Communications (XLC +1.26%) were top. Technology (XLK -0.22%) was the bottom sector for the day.
Expectation: Higher
The markets topped a bullish week with one more gain on Friday. Every day this week produced a higher high and a higher low on the Nasdaq. The broad market rally continued despite disappointing employment data as investors hope the data will accelerate the stimulus bill through congress.
The index closed with a +0.57% gain on lower volume. The closing range was 81%. The long lower wick, created by a morning dip right after open, is below a 27% body. The opening price became support in the afternoon as the index tested the area twice. There were two advancing stocks for every declining stock.
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The Meaning of Life (View on the Week)
This was one of the best weeks since November. The previous was the worst week since October. Déjà vu. You may remember the very short market correction we had back in late October. Within just a few days we had into a new market correction and back to a confirmed uptrend. This past two weeks marks a similar journey, dipping from new all-time highs to below the 21d EMA in a few days, and then back to new all-time highs a few days later.
The Nasdaq finished the week with a +6.01% gain on lower volume. Volume was lower, but still above average. The closing range of 97% and a 85% green body marks a week where every day had a higher low and higher high. The steady climb throughout the week only paused on Wednesday.
The bullish week was shared across segments with the Russell 2000 and S&P 500 reaching new all-time highs and the Dow Jones Industrial approaching a new all-time high. All sectors in the SPDR ETF list had gains for the week.
The rally was fueled by growing investor confidence and optimism for the stimulus. The previous week, investor confidence was shaken by a flurry of retail trading targeted at a few stocks which disrupted hedge funds and trading platforms.
The average closing range for the past 14 weeks has been at 70%, but is 60% over the past six weeks. The closing range for the past six weeks has rotated weekly from the lower half of the weekly candles to the upper half of the weekly candles. One week will be an accelerated gain, followed up by a week to pause or even pullback.
The S&P 500 (SPX) gained +4.65% for the week. The Dow Jones Industrial (DHI) advanced +3.89%. The Russell 2000 (RUT) was the top performer of the major indexes with a +7.70% gain.
Energy ( XLE ) was back on top for the first week of February. The sector benefited from higher than expected demand in oil that also raise crude oil prices throughout the week.
Technology ( XLK ) started the week in the lead, having a strong Monday. The Consumer Discretionary ( XLY ) took the lead on Tuesday. Financials ( XLF ) briefly moved to the top spot on Thursday, but was soon passed by Energy again.
Health Care ( XLV ) was at the bottom of the list for the week.
Materials ( XLB ) was the worst performing sector on Thursday, but led the sectors on Friday.
The US 30y and 10y Treasury Bond yields both rose significantly for the week. The US 2y treasury bond yield dropped. This resulted in a yield curve that is at its steepest since 2015. The steep curve is a result of investors seeing better growth for the economy in the short term, given that some form of stimulus is just around the corner. Economic activity is already recovering and more stimulus will make it stronger.
High Yield Corporate Bonds (HYG) had its highest weekly close since before the March market crash. Investors are preferring the riskier High Yield Corporate bonds to the Investment Grade Corporate bonds (LQD).
The US Dollar (DXY) advanced +0.51% for the week.
Silver (SILVER) had a wild ride this week as it was targeted by retail traders. It ended the week down -0.15%. Gold (GOLD) dropped -1.83%.
Crude Oil Futures (CRUDEOIL1!) gained a massive +8.40% week and drove Energy (XLE) to the top of the sector list.
Timber (WOOD) was up +4.95%. Similar to the indexes, it has been rotating up and down for the past six weeks. Copper (COPPER!1) advanced +2.20%. Aluminum (ALI1!) advanced +1.85%. Much of the advance for these came in the last day of the week when the Materials sector (XLB) also led the sector list for the day.
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The Big Four Mega-caps
We've been tracking the breakouts of the four big mega-caps over the past few weeks. Since the September correction, that had all been consolidating. However, the past two weeks brought earnings announcements.
Microsoft (MSFT)'s breakout is going well, gaining 14% over the past three weeks. Alphabet (GOOGL) has advanced over 20% in the same time.
Apple (AAPL) attempted a breakout last week, but the breakout broke down and did not resume this week. However, it is still holding above the 10w MA and is creating higher lows each week. It's reasonable to expect another breakout move in the next week.
Amazon (AMZN) released earnings this past week and although the numbers were great, the market reacted to the news that Jeff Bezos would step aside. Nonetheless, you see a pattern of higher highs and higher lows leading the stock out of the consolidation range.
The action of these mega-caps influences the indexes which influence the market. Keep an eye on them.
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Investor Sentiment
The put/call ratio (PCCE) ended the week at 0.578, back to overly bullish optimism. A contrarian indicator, when the put/call ratio is below 0.7, it signals overly bullish sentiment which typically proceeds a pullback in the market. The indicator was at 0.458 just before the September correction and it was at 0.489 just before the short October correction.
The CNN Fear & Greed index moved back to the Greed level, but is not at an extreme level.
Money managers lowered their exposure level for another week according to the NAAIM Exposure Index.
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The Week Ahead
There is no major economic events scheduled for Monday, however keep an eye on the stimulus progress as it moves through congress.
Tuesday will bring the EIA short-term energy outlook and a new JOLTs Job Openings report for December.
Core CPI for January will be released on Wednesday before market open. This is a key indicator to measure inflation and is how the Fed targets the 2% ideal inflation number. Crude Oil Inventories will be updated after the market opens.
Thursday brings the OPEN Monthly Report in the morning. Initial Jobless Claims will be released before market open. And the Fed will release its Monetary Policy Report mid-morning.
On Friday, we'll get an update on Consumer Sentiment for February.
It will be another busy week for earnings reports. Softbank (SFTBF) will announce on Monday. Chegg (CHGG) releases earnings after market close on Monday. Twitter (TWTR) announces on Tuesday. Coca-Cola (KO), Toyota (TM), Uber (UBER), and General Motors (GM) all release earnings on Wednesday. Zillow (Z), Zynga (ZNGA) also on Wednesday. Walt Disney (DIS), Pepsi (PEP), DexCom (DXCM), DataDog (DDOG), Cloudflare (NET), Expedia (EXPE) are all on Thursday.
That is a very abbreviated list of earnings throughout the week. Be sure to check for scheduled earnings reports for stocks in your own portfolio.
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The Bullish Side
After a bearish week last week, the market told us it was not ready to back down yet. This week's strong recovery and steady bullish gains throughout the week are a statement to investors. The rally was driven by confidence in the economic recovery and optimism that a new stimulus bill will make economic recovery even better.
It seems we've cleared past the retail investor craziness of the past few weeks. Although Wall Street Bets will continue to exist, I think a large enough number of those investors got burned by buying near the top that we'll see less commitment to future short squeeze attempts.
Earnings reports have continued to outperform expectations. As you page through the reports for the past two weeks, earnings expectations are being beat in all cap segments and all industry sectors. Those expectations were lowered by analysts worried about the economy, but the results bring more confidence in the strength of the recovery.
The treasury yield curve is a big indicator of what investors are expecting from the economic recovery and impact of further stimulus. Investors are moving away from longer term bonds and into shorter term treasury bonds. They are moving from safe Investment Grade corporate bonds to riskier High Yield corporate bonds.
Energy is back at the lead for the sectors. Energy doesn't have to lead for market rallies, but when it is leading, the market is almost always in a rally.
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The Bearish Side
Investor optimism remains a mix of overly bullish sentiment represented by the put/call ratio, but caution as seen by the CNN Fear & Greed indicators. The mix means investors want to stay in the market and capitalize on gains, but seem to have one foot out the door in case things go bad. That has resulted in this back and forth of up and down weeks the past six weeks.
That back and forth has also resulted in a number of huge spikes in the VIX volatility index over the past 1.5 months. Analysts often see the number of spikes of 20% or more as an indicator of a pending downturn in the market.
The passing of a stimulus seems likely, but is not guaranteed. It also seems certain that the package will change as negotiations continue in congress. The market may be sensitive to those changes and would definitely react negatively of the stimulus talks stall.
There has been great progress in getting vaccines out to the public, but we are not out of the woods yet. Bad news could be new mutations or failure of the supply chain for producing the vaccines.
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Key Nasdaq Levels to Watch
There are several key levels in the Nasdaq to keep an eye out for and respond accordingly. First on the positive side:
On the downside, there are several key levels to raise caution flags:
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Wrap-up
It was a powerful week that many traders and investors saw a tremendous number of gains. That makes it tough to have an expectation for the next week. Will investors want to take some profits and move to the sidelines or will the rally continue, fueled by stimulus and more earnings reports that beat expectations?
The key thing this past two weeks point out is that you can't overreact to market signals. Ending last week, you might have wanted to sell everything and run to safety. However, you would have missed out on a huge week of gains.
So how do you handle the mixed signals? Follow your system. Look at where you're individual stock picks are doing against your buy and sell rules. If the market is signaling caution and fear is creeping in, then reduce position sizes, but avoid panic selling.
Let's hope for another great week of gains!
Good luck, stay healthy and trade safe!
I do occasionally have some errors or typos and will correct them in my blog or in the comments on TradingView. I do not have an editor and do this in my free time.
If you find this helpful, please let me know in the comments. I am also more than happy to add new perspectives and data points if you have ideas.
The structure is the following:
- A recap of the daily updates that I do here on TradingView.
- The Meaning of Life, a view on the past week
- What's coming in the next week
- The Bullish View, The Bearish View
- Key index levels to watch out for
- Wrap-up
If you have been following my daily updates, you can skip down to the “The Meaning of Life”. If not, then this first part is a great play-by-play recap for the week. Click the original charts for more detail each day.
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Monday, February 1, 2021
Facts: +2.55%, Volume lower, Closing range: 91%, Body: 59%
Good: Close back above the 21d EMA, steady climb after morning dip
Bad: Nothing
Highs/Lows: Higher high, higher low
Candle: Thick green body with longer lower wick
Advance/Decline: 3.19, three advancing stocks for every declining stock
Indexes: SPX (+1.61%), DJI (+0.76%), RUT (+2.53%), VIX (-8.61%)
Sectors: Consumer Discretionary (XLY +2.60%) and Technology (XLK +2.51%) were top. Consumer Staples (XLP +0.09%) and Health Services (XLV +0.38%) were bottom.
Expectation: Sideways or Higher
February kicked off with broad gains across the Nasdaq. The index took a short dip in the morning and then headed upward for the rest of the day. Manufacturing data released after market open was a little lower than analyst expectations, but still high compared to the two-year monthly average.
The Nasdaq closed the day with a +2.55% gain on lower volume. The closing range of 91% and the 59% green body show the strong buying that occurred throughout the day after a morning dip. The index closed above the 21d EMA, a key area of support. Many participants benefited from the gains as there were three advancing stocks for every declining stock.
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Tuesday, February 2, 2021
Facts: +1.56%, Volume higher, Closing range: 82% (with gap), Body: 60%
Good: Solid gains throughout the morning and early afternoon.
Bad: Slight fade in late afternoon
Highs/Lows: Higher high, higher low
Candle: Gap up, thick green body with small upper wick from fade
Advance/Decline: 2.81, almost three advancing stocks for every declining stock
Indexes: SPX (+1.39%), DJI (+1.57%), RUT (+1.19%), VIX (-15.48%)
Sectors: Financials (XLF +2.42%) and Consumer Discretionary (XLY +2.12%) were top. Real Estate (XLRE +0.43%) and Health Services (XLV +0.29%) were bottom.
Expectation: Higher
The market added to Monday's gains with another positive day on Tuesday. Volatility fell back to more stable levels while gains continued to be spread broadly across stocks. The market faded slightly going into close, possibly as investors prepared for earnings reports from Amazon (AMZN) and Alphabet (GOOGL).
The Nasdaq closed the day with a +1.56% gain on higher volume. The closing range with the gap was 82% and a 60% green body sits under a short upper wick created by the late afternoon fade. The rising window candle indicates a bullish continuation, but with some caution given the fade into close. Almost three stocks advanced for each declining stock, the second day of broad advances.
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Wednesday, February 3, 2021
Facts: -0.02%, Volume higher, Closing range: 18%, Body: 78%
Good: Higher high, higher low, held support above morning low
Bad: Sell off late afternoon
Highs/Lows: Higher high, higher low
Candle: Mostly red body formed from morning and afternoon dips
Advance/Decline: 1.65, almost three advancing stocks for every two declining stocks
Indexes: SPX (+0.10%), DJI (+0.12%), RUT (+0.38%), VIX (-10.37%)
Sectors: Energy (XLE +4.27%) and Communications (XLC +1.34%)were top. Consumer Discretionary (XLY -0.56%) and Health Services (XLV +0.29%) were bottom.
Expectation: Sideways or Lower
The Nasdaq paused today after two days of big gains. It made two attempts to have another day of gains, but dipped in morning and late afternoon trading. Still there were advances across a large number of stocks, fueled by great earnings reports from big mega-caps the day before.
The Nasdaq closed with a -0.02% loss, moving sideways after gaining over 4% the past two days. Volume was slightly higher than the previous days. The closing range of 18% and a red body of 78% are the result of the morning and late-afternoon dips. Overall, the candle presents bearish, so expectations are set for sideways or lower. Advancing stocks did outnumber declining stocks on a 3 to 2 ratio.
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Thursday, February 4, 2021
Facts: +1.23%, Volume lower, Closing range: 100%, Body: 71%
Good: Constant gain after morning dip, new all-time high
Bad: Nothing
Highs/Lows: Higher high, higher low
Candle: Mostly green body with short lower wick, no upper wick
Advance/Decline: 2.70, More than two advancing stocks for every declining stock
Indexes: SPX (+1.09%), DJI (+1.08%), RUT (+1.98%), VIX (-4.98%)
Sectors: Financials (XLF +2.22%) and Technology (XLK +1.60%) were top. Materials (XLB -0.36%) was the only sector to lose for the day.
Expectation: Higher
A positive expectation breaker is always welcome in the Daily Market Update. Despite yesterday's candle showing some bearish indication, today the Nasdaq proved it wasn't ready to move back down. A new all-time high adds to the string of higher highs and higher lows we've had all week.
The index closed with a +1.23% gain. Volume was lower than the previous day but continues to be higher than the 50d moving average volume. The candle has a closing range of 100% created by a spike in prices in the last 10 minutes of trading. The short lower wick was created in a 30 minute window of volatility in the morning. There were more than two advancing stocks for every declining stock.
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Friday, February 5, 2021
Facts: +0.57%, Volume lower, Closing range: 81%, Body: 27%
Good: New all-time high, not overly heated gain
Bad: Some pullback in the afternoon
Highs/Lows: Higher high, higher low
Candle: Thin body in upper half of the candle, longer lower wick from morning dip.
Advance/Decline: 1.95, two advancing stocks for every declining stock
Indexes: SPX (+0.39%), DJI (+0.30%), RUT (+1.40%), VIX (-4.13%)
Sectors: Materials (XLB +1.72%) and Communications (XLC +1.26%) were top. Technology (XLK -0.22%) was the bottom sector for the day.
Expectation: Higher
The markets topped a bullish week with one more gain on Friday. Every day this week produced a higher high and a higher low on the Nasdaq. The broad market rally continued despite disappointing employment data as investors hope the data will accelerate the stimulus bill through congress.
The index closed with a +0.57% gain on lower volume. The closing range was 81%. The long lower wick, created by a morning dip right after open, is below a 27% body. The opening price became support in the afternoon as the index tested the area twice. There were two advancing stocks for every declining stock.
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The Meaning of Life (View on the Week)
This was one of the best weeks since November. The previous was the worst week since October. Déjà vu. You may remember the very short market correction we had back in late October. Within just a few days we had into a new market correction and back to a confirmed uptrend. This past two weeks marks a similar journey, dipping from new all-time highs to below the 21d EMA in a few days, and then back to new all-time highs a few days later.
The Nasdaq finished the week with a +6.01% gain on lower volume. Volume was lower, but still above average. The closing range of 97% and a 85% green body marks a week where every day had a higher low and higher high. The steady climb throughout the week only paused on Wednesday.
The bullish week was shared across segments with the Russell 2000 and S&P 500 reaching new all-time highs and the Dow Jones Industrial approaching a new all-time high. All sectors in the SPDR ETF list had gains for the week.
The rally was fueled by growing investor confidence and optimism for the stimulus. The previous week, investor confidence was shaken by a flurry of retail trading targeted at a few stocks which disrupted hedge funds and trading platforms.
The average closing range for the past 14 weeks has been at 70%, but is 60% over the past six weeks. The closing range for the past six weeks has rotated weekly from the lower half of the weekly candles to the upper half of the weekly candles. One week will be an accelerated gain, followed up by a week to pause or even pullback.
The S&P 500 (SPX) gained +4.65% for the week. The Dow Jones Industrial (DHI) advanced +3.89%. The Russell 2000 (RUT) was the top performer of the major indexes with a +7.70% gain.
Energy ( XLE ) was back on top for the first week of February. The sector benefited from higher than expected demand in oil that also raise crude oil prices throughout the week.
Technology ( XLK ) started the week in the lead, having a strong Monday. The Consumer Discretionary ( XLY ) took the lead on Tuesday. Financials ( XLF ) briefly moved to the top spot on Thursday, but was soon passed by Energy again.
Health Care ( XLV ) was at the bottom of the list for the week.
Materials ( XLB ) was the worst performing sector on Thursday, but led the sectors on Friday.
The US 30y and 10y Treasury Bond yields both rose significantly for the week. The US 2y treasury bond yield dropped. This resulted in a yield curve that is at its steepest since 2015. The steep curve is a result of investors seeing better growth for the economy in the short term, given that some form of stimulus is just around the corner. Economic activity is already recovering and more stimulus will make it stronger.
High Yield Corporate Bonds (HYG) had its highest weekly close since before the March market crash. Investors are preferring the riskier High Yield Corporate bonds to the Investment Grade Corporate bonds (LQD).
The US Dollar (DXY) advanced +0.51% for the week.
Silver (SILVER) had a wild ride this week as it was targeted by retail traders. It ended the week down -0.15%. Gold (GOLD) dropped -1.83%.
Crude Oil Futures (CRUDEOIL1!) gained a massive +8.40% week and drove Energy (XLE) to the top of the sector list.
Timber (WOOD) was up +4.95%. Similar to the indexes, it has been rotating up and down for the past six weeks. Copper (COPPER!1) advanced +2.20%. Aluminum (ALI1!) advanced +1.85%. Much of the advance for these came in the last day of the week when the Materials sector (XLB) also led the sector list for the day.
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The Big Four Mega-caps
We've been tracking the breakouts of the four big mega-caps over the past few weeks. Since the September correction, that had all been consolidating. However, the past two weeks brought earnings announcements.
Microsoft (MSFT)'s breakout is going well, gaining 14% over the past three weeks. Alphabet (GOOGL) has advanced over 20% in the same time.
Apple (AAPL) attempted a breakout last week, but the breakout broke down and did not resume this week. However, it is still holding above the 10w MA and is creating higher lows each week. It's reasonable to expect another breakout move in the next week.
Amazon (AMZN) released earnings this past week and although the numbers were great, the market reacted to the news that Jeff Bezos would step aside. Nonetheless, you see a pattern of higher highs and higher lows leading the stock out of the consolidation range.
The action of these mega-caps influences the indexes which influence the market. Keep an eye on them.
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Investor Sentiment
The put/call ratio (PCCE) ended the week at 0.578, back to overly bullish optimism. A contrarian indicator, when the put/call ratio is below 0.7, it signals overly bullish sentiment which typically proceeds a pullback in the market. The indicator was at 0.458 just before the September correction and it was at 0.489 just before the short October correction.
The CNN Fear & Greed index moved back to the Greed level, but is not at an extreme level.
Money managers lowered their exposure level for another week according to the NAAIM Exposure Index.
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The Week Ahead
There is no major economic events scheduled for Monday, however keep an eye on the stimulus progress as it moves through congress.
Tuesday will bring the EIA short-term energy outlook and a new JOLTs Job Openings report for December.
Core CPI for January will be released on Wednesday before market open. This is a key indicator to measure inflation and is how the Fed targets the 2% ideal inflation number. Crude Oil Inventories will be updated after the market opens.
Thursday brings the OPEN Monthly Report in the morning. Initial Jobless Claims will be released before market open. And the Fed will release its Monetary Policy Report mid-morning.
On Friday, we'll get an update on Consumer Sentiment for February.
It will be another busy week for earnings reports. Softbank (SFTBF) will announce on Monday. Chegg (CHGG) releases earnings after market close on Monday. Twitter (TWTR) announces on Tuesday. Coca-Cola (KO), Toyota (TM), Uber (UBER), and General Motors (GM) all release earnings on Wednesday. Zillow (Z), Zynga (ZNGA) also on Wednesday. Walt Disney (DIS), Pepsi (PEP), DexCom (DXCM), DataDog (DDOG), Cloudflare (NET), Expedia (EXPE) are all on Thursday.
That is a very abbreviated list of earnings throughout the week. Be sure to check for scheduled earnings reports for stocks in your own portfolio.
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The Bullish Side
After a bearish week last week, the market told us it was not ready to back down yet. This week's strong recovery and steady bullish gains throughout the week are a statement to investors. The rally was driven by confidence in the economic recovery and optimism that a new stimulus bill will make economic recovery even better.
It seems we've cleared past the retail investor craziness of the past few weeks. Although Wall Street Bets will continue to exist, I think a large enough number of those investors got burned by buying near the top that we'll see less commitment to future short squeeze attempts.
Earnings reports have continued to outperform expectations. As you page through the reports for the past two weeks, earnings expectations are being beat in all cap segments and all industry sectors. Those expectations were lowered by analysts worried about the economy, but the results bring more confidence in the strength of the recovery.
The treasury yield curve is a big indicator of what investors are expecting from the economic recovery and impact of further stimulus. Investors are moving away from longer term bonds and into shorter term treasury bonds. They are moving from safe Investment Grade corporate bonds to riskier High Yield corporate bonds.
Energy is back at the lead for the sectors. Energy doesn't have to lead for market rallies, but when it is leading, the market is almost always in a rally.
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The Bearish Side
Investor optimism remains a mix of overly bullish sentiment represented by the put/call ratio, but caution as seen by the CNN Fear & Greed indicators. The mix means investors want to stay in the market and capitalize on gains, but seem to have one foot out the door in case things go bad. That has resulted in this back and forth of up and down weeks the past six weeks.
That back and forth has also resulted in a number of huge spikes in the VIX volatility index over the past 1.5 months. Analysts often see the number of spikes of 20% or more as an indicator of a pending downturn in the market.
The passing of a stimulus seems likely, but is not guaranteed. It also seems certain that the package will change as negotiations continue in congress. The market may be sensitive to those changes and would definitely react negatively of the stimulus talks stall.
There has been great progress in getting vaccines out to the public, but we are not out of the woods yet. Bad news could be new mutations or failure of the supply chain for producing the vaccines.
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Key Nasdaq Levels to Watch
There are several key levels in the Nasdaq to keep an eye out for and respond accordingly. First on the positive side:
- Friday's high of 13,878.61 will be the first test. Another weekly high would be a great sign for a continued rally.
- The next level will be 14,000 which could be met with round-number resistance. This is the tendency for traders to pick round-numbers for profit taking. Some may view 14,000 as potential top and move to the sidelines for safety.
On the downside, there are several key levels to raise caution flags:
- The 21d EMA is at 13,357.48. That is around 3.5% below Friday's close.
- The low of the week this past week is 13,132.47. Not creating a new low will be the first test of the downside.
- There is support at the 13,000 area, seen in the lows from the first week of 1/11.
- The 50d MA is at 12,899.22. A violation of this line will be an added warning side. It has not been tested since 11/4.
- Several possible areas of support at 12,550, 12,250, and 12,000.
- The 200d MA moved above the lows of October and is now about 20% below the index at 11,170.35.
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Wrap-up
It was a powerful week that many traders and investors saw a tremendous number of gains. That makes it tough to have an expectation for the next week. Will investors want to take some profits and move to the sidelines or will the rally continue, fueled by stimulus and more earnings reports that beat expectations?
The key thing this past two weeks point out is that you can't overreact to market signals. Ending last week, you might have wanted to sell everything and run to safety. However, you would have missed out on a huge week of gains.
So how do you handle the mixed signals? Follow your system. Look at where you're individual stock picks are doing against your buy and sell rules. If the market is signaling caution and fear is creeping in, then reduce position sizes, but avoid panic selling.
Let's hope for another great week of gains!
Good luck, stay healthy and trade safe!
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