Negative News Accelerating? Without question AAPL dominated the headlines with its lowered numbers after the bell last night, but perhaps we should become accustomed to more of these preannouncements and negative news in general. Other high profile names that did the same recently were MU and FDX, and this is an ominous sign. The Nasdaq lost 3% Thursday ending a 5 day winning streak. This very volatile behavior we are witnessing is just the opposite of what normally happens in bottoming patterns. When stocks or indexes bottom it tends to be accompanied by smooth, rounded shapes that take time. Perhaps most of the PRICE correction is behind us, but the time aspect could go on longer than many anticipate. And that would give it a chance to build to a smooth foundation we have been stressing. Instead we keep hearing that Powell now must say this or that Friday to placate the averages, and of course the normal China trade talks have been front and center. Not to long ago it was the Fed must reverse course of their perceived interest rate hikes this year. News does not often put an end to selling. In my opinion the market will find a floor and it will turn around on its own, devoid of any statements. For one the incessant calls for a bottom would be a good start. Keep An Eye on Relative Strength: The semiconductors have been lagging for almost a year now, as they were the first subgroup to falter within technology. The SMH topped the week ending 3/16 which was the middle week of a bearish evening star pattern and the ETF now sits 28% off its most recent 52 week highs. The next 7 months coiled as a WEEKLY symmetrical triangle took shape with a break below 100 the week ending 10/12 recording a breakdown, and it now sits at its measured move of 18 handles lower. This is merely a guideline, and anything but science, as many winners on the long and short side are sold to early leaving big money on the table. Below is a chart comparing the semis to software and the Nasdaq itself, since the March drawdown for semis. Obviously on an absolute basis it is falling, but relatively speaking software is holding up well. Now this is still a time to be heavily in cash, but when the market does eventually turn around, ones watchlist within technology should be heavily skewed toward software names. Examples: In 2018 "old tech" names held up pretty well and many even outshined there newer competitors. MSFT transformed itself from a hardware name, and to be frank it is having issues with the very round par number at the moment. The move above 100 the prior 5 sessions may have been a bull trap as today it finished comfortably underneath it. CSCO was a reliable name until failing to break above a cup base trigger near the round 50 number on 12/4 and is rapidly 17% off its own most recent 52 week highs. Below is the chart of perhaps a lesser known name, PLAB and how it was portrayed in our Technology Report on 12/28. The semiconductor equipment play has some nice technical aspects going on at the moment with a gap fill holding nicely from the 8/21 session. It has enjoyed 200 day SMA support and today fell but recorded a bullish hammer candle. The round 10 number has given it issues, but if it can clear that area a nice cup base is taken shape. In this environment however it is best to stay very small and nimble and wait for the major averages to find some strength.
Group Overview: Market participants were somewhat nervous early on, as futures were firmly lower to start 2019. The "first five days of January" indicator, which one should never make investment decisions based upon, states that the direction of the markets are determined by the fresh start of a new year. Obviously this was dispelled in 2018 as the averages finished mildly lower, even after the S&P 500 rose by nearly 3% between 1/2-8/18. Looking specifically at the industrials most of the individual subsectors were very soft. The homebuilders come to mind with the ITB still 35% off most recent 52 week highs, and the very important transports that still linger in bear market territory with the IYT off 21% from its own highs. GE will be looking for its first 4 week winning streak in more than THREE years, and it is higher by almost 7% this week headed into Thursday, so the likelihood is high. The XLI itself bounced strongly off the round 60 number on 12/26, and that low could be used as a stop for those looking to enter. One of the most breathtaking drops in the group in my opinion was that of XPO which slumped more than a quarter of its value alone on 12/13. It is now approaching that area after its own revised lower forecast Wednesday and the short seller announcement Thursday of that week. Line in the sand moment and it better have its 4 wheel drive function on if bulls want more capital appreciation. Mexico Mojo? The emerging markets did show respectable relative strength in the latter part of 2018, and Mexico seems like an intriguing region. Looking purely on its country ETF the EWW it seems to have found a floor recently higher 4 of the last 5 weeks with all CLOSING above the round 40 number. To be fair the best weekly advance was registered last week at a lukewarm 1.8%, and it recently recorded an 8 week losing streak the weeks ending between 10/5-11/23 over concerns with the new incoming administration. We all are aware moves overshoot on both the up and downside and below may be an interesting small cap name OMAB, an airport play from south of the border. The stock is 31% off most recent 52 week highs following a powerful 13 of 17 week winning streak the weeks ending between 6/8-9/28, but that was followed by an 11 week LOSING streak, before the last 2 rose by nearly a combined 17%. Is the name ready for a takeoff, pun intended? Examples: The round number theory continues to prove its worth, of course not 100% of the time like anything else in life or markets. The S&P 500 will have something to prove IF and when it hits the 2600 figure for example, a level that has influence dating back to last November, and had many weeks show support there. Obviously it cracked and one should watch with great interest what occurs there if tested. Below is the chart of an industrial play HSC, and how it appeared in our 12/20 report. It continues to hang around the very round 20 number which was the area of a weekly double bottom breakout late last February (remember the longer the base, the greater the probability of success upon breakout). On 9/13 the 30 number was precise resistance and this chart should be given the benefit of the doubt as it has been making higher highs and lows on its WEEKLY chart since July '16.
Group Overview: The XLY is getting ready for a line in the sand retest at the very round par figure. That level was support in both October and November before breaking below that number which was the horizontal line in a bearish descending triangle trigger. It came nowhere close to achieving its measured move lower of 18 handle, but measured moves are barely a guideline. That being said the bears are still in control as the ETF is still 16% off most recent 52 week highs, and that is with the current 2 week winning streak that rose a combined 5.6%. There was some foreshadowing as a 3 week tight pattern at all time highs, was taken out to the DOWNSIDE as the three weeks ending between 9/14-28 all CLOSED within just .30 of each other. The last 2 sessions recorded spinning top candles after a quick 10% move. January should prove very valuable to the direction of this group, and the overall market. If history repeats itself like the beginning of 2018, when the XLY climbed above 100 on the very first day of the year and proceeded to advance 14 of the first 18 sessions, traders will be on the lookout for another volatile year. Recession In '19? Recession seems to be on the top of many market participant lips, and for that reason alone it is probably not likely to occur anytime soon. And the retail group is certainly heavily influenced if one were to happen as GDP is comprised 2/3rds by consumer spending. I did read an interesting tweet by @DavidBCollum recently that said "In 1991, 51 economists were asked whether we would be in a recession that year. None said yes. We were already in one." Could the weakness in some of the sector be saying so once again? I doubt it, but we know there were some alarming drops in retail names in '18. Many are aware of the ineptitude of a name like JCP off 78% from most recent 52 week highs, and CLOSED below $1 on 12/27 and could be in jeopardy of a delisting in '19. But stocks like TIF, BBY and PLCE all hovering in the 40% off most recent 52 week highs are surprising. Is this action showing a weak overall trend, or is it company specific? As always focus on the PRICE action, because no one really knows about the question referenced in the prior sentence. Examples: The housing slump in 2018 was a big story and its affliction spread to a wide variety of subsectors within. The furnishing plays were hurt with LZB still 29% off most recent 52 week highs. LL, a lumber play trades 71% off most recent 52 week highs, now trades in the single digits. Below is the chart of WSM and how it appeared in our 12/4 Consumer Report. This stock has fallen 14 of the last 18 weeks and trades 32% off its most recent 52 week highs. The week ending 8/24 jumped more than 20% and looked well on its way to completing a long WEEKLY cup base trigger that began the week ending 8/21/15, and shows why investors should be very flexible as yesterdays leaders could quickly become tomorrows laggards (and why technical analysis can save investors fortunes). It filled in an upside gap from 11/15 on 12/3 at the round 60 number, and presently is finding support at the very round 50 figure.
Group Overview: Without big bifurcation during the last session of 2018 on Monday, a half day, between healthcare and the utilities, the healthcare space will be the best performing major S&P sector (would be its first time at the top of the sector leaderboard in over a decade). Only 3 of the 11 groups are currently in the green YTD, and discretionary is holding on by a thread. It certainly demonstrates the defensive posture the markets took this year. The XLV currently sits 11% off most recent 52 week highs, and this week put an end to its first three week losing streak in over a year, advancing 3.1%. Volume trends since October have been very bearish. The weeks ending 10/12, 10/26 and 12/21 fell 3.4, 4.5 and 7.1%, all accompanied by volume twice the weekly average. Give credit to the ETF for holding up lukewarmly well given this months 10% haircut from its largest component JNJ. ABBV, the XLV's fifth largest name, should be put on investors watchlist. It reversed Friday after touching its downward sloping 200 day SMA for the fourth time since June. The stubbornness of that resistance should be ebbing with each kiss of that secular line. A move above, and CLOSE, could be robust. Looking Into the Diversity of Healthcare: Peering into some of the different arenas of the overall group just after the February correction, two things stand out to me. The consistent lagging from the biotechs via the IBB, and the power of the small cap names, through the PSCH between March and September. That small cap outperformance turned into a tailspin, and the ETF is now off 26% from its most recent 52 week highs. It lost value 12 of the last 17 weeks, and the three weeks ending between fell by a combined 22.7%, highlighting its volatile nature. The IBB will be potentially coming up on an important retest of the very round par number, that it sliced below the week ending 12/21 losing almost 11% in big trade. That level was good support numerous weeks since breaking above 100 the week ending 6/23/17. Its success could depend on its largest component AMGN which sits just 9% off its most recent 52 week highs (great relative strength against IBB which is 23% off its recent highs), compared with the "old big four", as BIIB, GILD and CELG trade 24, 31 and 43% respectively off their own recent 52 week highs. Examples: The cannabis space has certainly sprung to life in 2018 with CGC getting a $4 billion investment from STZ this August. For those that missed the big move, that more than doubled following the announcement, it has now filled in the gap from the 8/14 session on 12/21. Altria recently made its own investment in CRON, as names jockey to get a strong foothold in the space. TLRY is now 75% off its most recent 52 week highs, and displays the round number theory with a precise puff, pun intended, off the very round 300 number on 9/19 before its descent. Below is the chart of more established member of the arena, GWPH and how it appeared in our 12/19 Healthcare Report. It reiterates the virtue of patience as there will be sizable drawdowns in any nascent industry, and this stock has been cut in half from the recent September highs. The stock bounced off the very round 90 number on 12/27, but is still well below the bear flag breakdown.
Nasdaq Lucky Seven Unlikely: The Nasdaq added .4% Thursday after a wild intraday ride, but did underperform the Dow and S&P 500 which rose by 1.1 and .9% respectively. The tech heavy benchmark is still nearly 5% lower YTD, and without another huge rally the last 1 1/2 sessions it will put an end to a 6 year winning streak. Let us give credit where it is due as it is still outperforming peers on a relative basis as the Dow, S&P 500 and Russell 2000 have all declined by 6.4, 6.9 and 13.3% thus far in 2018. One could make the case the bottom could be in after the historic session on Wednesday, and todays bullish reversal CLOSING more than 240 handles off intraday lows. Some of the most influential technology names gave clues to the 2 day, rip your race off rally. GOOGL recorded a doji candle Monday, and has since stormed back above the very round 1000 number, which was support dating back to December 2017. AMZN registered a spinning top candle Monday, which often signals a potential reversal of the prevailing trend. There is still work to do, but that last 2 days seem to have brought out Santa. The VIX is looking to retest a 28.94 cup base trigger taken out on 12/24 and 2019 should be a very interesting year. Software Acting Anything But: It is old news to mention that the software group has been the best subsector within technology. Usually it is the semiconductors that will stand out during a firm Nasdaq advance, but softwares strength is indisputable. Below is the ratio chart comparing it to the benchmark many money managers measure themselves against. The power they have displayed is clear to see. We know there has been a decent amount of M&A activity in the space, with the big one RHT being swallowed by IBM. But there have been others including IMPV MB and APTI to name a few since October. The IGV is now out of bear market territory down 17% off most recent 52 week highs. The second biggest holding in the ETF is MSFT just above 8%, and it will give valuable clues to the funds direction, and the Nasdaq. Will the break below the very round 100 number on 12/21 and today produce a huge bounce as that figure was support on 10/30, 11/20 and 12/20. Or will the CLOSEs above 100 recently be a bull trap? You have to love watching the markets. Examples: Let us be totally frank. Long names have been totally decimated in the recent huge drawdown markets have endured, with the exception of course of the last 2 sessions. Any names that withstood the barrage should be given some kind of medal, and indeed they are few and far between. Below is the chart of VCRA and how the telecommunications equipment name was presented in our Technology Report from 11/14. The stock sank in October like everything else, but held its own in November posting very admirable weekly gains of 5.5, 4.5 and 8.9% the weeks ending 11/9, 11/16 and 11/30. It broke above a bull flag pattern, which began at the round 30 number in late October on 11/15, and acted well POST breakout, a great sign. Give credit for the name never CLOSING below its rising 50 day SMA since climbing above it on 10/26. Even with the recent extreme downside volatility it remains well above the highlighted trigger. Keep this name on your best of breed watchlist.