Weekly Market Analysis: Week 06 Recap / Week 07 Preview

Weekly Recap

Dow Jones Industrial Average

DJIA

Standard & Poor’s 500

SPX

Nasdaq Composite

NASDAQ

The stock market began the week on a subdued note. The Dow Jones Industrial Average, Nasdaq, and S&P 500 posted gains between 0.1% and 0.5% with the Nasdaq Composite ending in the lead. Overall, the session had a ‘wait-and-see’ feel as many participants stuck to the sidelines ahead of Janet Yellen’s testimony on monetary policy. The limited participation was reflected in the trading volume as only 640 million shares changed hands at the NYSE.

On Tuesday, the stock market rallied steadily with the Dow Jones Industrial Average (+1.2%) providing the lead. Thanks to the advance, the Dow narrowed its 2014 loss to 3.5% while the Nasdaq (+1.0%) was able to swing from a loss to a year-to-date gain of 0.4%. The S&P 500 (+1.1%) regained its 50-day moving average with all ten sectors contributing to the climb. Contrary to the expectations of many, Janet Yellen’s testimony before the House Financial Services Committee was uneventful as the Chair struck a tone consistent with remarks made by her predecessor. When asked about the impact of the disappointing jobs reports for December and January on the Fed’s reaction function, Ms. Yellen said it would be premature to alter policy based on a limited sample size. All ten sectors took part in the advance with energy (+1.4%) and materials (+1.2%) ending in the lead. Despite the broad rally, trading volume was below average as less than 700 million shares changed hands at the NYSE.

Equity indices took a bit of a breather on Wednesday after the S&P 500 surged nearly 4.5% in the six sessions since February 3. The benchmark index shed less than a point while the Dow Jones Industrial Average slipped 0.2%. Overall, the session was very quiet as the key averages respected narrow ranges. The S&P 500 spent the bulk of the trading day near its flat line while the Nasdaq (+0.2%) outperformed. Again, participation was well below average with less than 630 million shares changing hands at the NYSE.

Thursday’s session saw the stock market rally steadily throughout the trading day despite starting on a lower note. Small caps led the way with the Russell 2000 climbing 1.3% while the S&P 500 advanced 0.6%. The benchmark index was down as much as 0.6% at the start after overnight weakness in the futures market set the stage for a lower open. The losses in futures coincided with a wave of yen strength that once again stoked fears about potential forced unwinds of the yen-based carry trade. Adding to the early weakness was a disappointing retail sales report for January. Even though stocks opened lower, the S&P 500 found support at its 50-day moving average in the 1810 area. The index also drew strength from the retreat in the yen as the dollar/yen pair climbed off its low just under the 101.75 level.

On Friday, the stock market ended an upbeat week on a positive note. The Dow Jones Industrial Average (+0.8%) paced the advance while the S&P 500 gained 0.5%. The Nasdaq (+0.1%) lagged, but was able to finish at its highest level since late 2000. Friday’s advance capped an impressive week during which the benchmark S&P 500 gained 2.3%. Even though stocks rallied sharply, it is worth noting that all five sessions of the week saw below-average volume while bellwether groups like financials and transports struggled to keep pace with the broader market. The financial sector added just 0.2% on Friday, extending its weekly gain to 1.6%. For its part, the Dow Jones Transportation Average (+0.3%) added 0.9% for the week.

Summary

Cyclically, Week 3 is bearish. And Week 4, is likely to follow suit but to a lesser extent. I am expecting largely sideways movement for this week with a slightly bearish tone. However I would also pay attention to Wednesday where the FOMC statement is released. Given the sentiment-driven market, what the Fed says will have a strong bearing on the performance.

Direction for Week 4 – DOWN

Much has changed since I last published my Weekly Market Analysis. The 4 Weeks of selling we saw throughout Jan changed when the market headed into Feb. Although the 1st trading session of Feb was very bearish, bulls came in quickly to reverse the tide against the bears. Since then, market have been thrown in an outstanding performance for the bulls and major indices are heading towards their pre-sell down levels. Week 5 was the reversal and week 6 saw the bulls took over and resume the bullishness we see throughout 2013.

Market Internals

VIX

VIX

Briefing-Weekly-Wrap

SPDR-Sector-ETFs

Nasdaq has yet again led the market for the week with a near 3% gain. Trailing behind is both the DJIA and SPX with good gains of 2.3% for the week. Year-to-date, Nasdaq broke even with a 1.6% gain while the rest of the major averages are still in negative territory with losses of 0.5% to 2.5%. Lagging the whole market is DJIA with a loss of 2.5% year to date.

In such a bullish week, all the sectors gained between 1.69% to 3.6%. Top performing sectors are Utilities and Materials and Health Care while Financials, Industrials and Consumer Discretionary trailed the overall S&P500 index.

The breakdown of sector performance certainly does not support the bullish week that passed and as 2 counter-cyclical sectors are among the leading sectors of the week. While on the other hand, the lagging sectors are all cyclical sectors. This is a possible sign of fear and cautiousness among the market participants in this stellar bullish week.

In addition, the daily volumes for the week have been below average of 746m. Notably, Friday’s volume was especially low with only 621m shares exchanging hands on the NYSE.

Technical Update

Dow Jones Industrial Average

Prophet-DJIA

DOW gained near 800 points since the reversal in early Feb, and around 400 points for the past week. Moving forward, I am expecting a consolidation after such a stellar bull run for the past week. Without a doubt, DJIA is certainly still on the long term uptrend, having just cleared above it’s 50D SMA. Moving forward, it remains to be seen if DJIA can break 16200 and if it does, next major resistance will be at 16600.

Standard & Poor’s 500

Prophet-SPX

Likewise, after a triumphant rally by the bulls for the past 2 weeks, SPX is heading towards its all time high of 1850.84. I am looking for SPX to inch towards this level and I dont think a break up of this resistance level will happen this week. SPX has cleared all its 20D and 50D SMA in the past week, and they will act as important dynamic support should SPX tank this week.

Nasdaq Composite

Prophet-Nasdaq

NASDAQ Composite, being the best performer for the week and year, closed around 4250 (all time high levels). Given the bullish momentum with technology sector lately, I would expect COMP to break through this key psychological level this week. In addition, COMP is the only average that is still long term and short term bullish while DJIA & SPX has a bearish crossover on their respective 20D and 50D SMA. Should COMP be unable to break up of the 4250 levels, it will correct and possibly find support on the 20D/50D SMA.

VIX

Prophet-VIX

Looking at VIX, which is range bounded between 12 and 21 for the whole of last year and this year, is on a short term down trend heading towards the key support level of 12. This is also in line with my expectations of a slightly bullish but consolidating week ahead.

Bond Market

Briefing Bond Chart

10-Yr: -03/32..2.744%.. USD/JPY: 101.85.. EUR/USD: 1.3698

The Week in Review: 

  • Treasuries posted their first weekly loss in six.
  • The complex has seen selling in seven of the past ten sessions.
  • On Tuesday, Fed Chair Janet Yellen testified in front of the House Financial Services Committee. She hinted,“The Committee will likely reduce the pace of asset
    purchases in further measured steps at future meetings.” 
    Thursday’s Senate Banking Committee testimony was postponed due to inclement weather.
  • Congress approved a clean debt ceiling bill that will keep the government funded through March 2015.
  • This week’s data was mostly disappointing as wholesale inventories (0.3% actual v. 0.6% expected), retail sales (-0.4% actual v. 0.0% expected), industrial production (-0.3% actual v, 0.3% expected), and capacity utilization (78.5% actual v. 79.4% expected) all fell short of estimates.
  • Only Michigan Sentiment (81.2 actual v. 80.2 expected) impressed.
  • This week’s auctions were unimpressive, but not terrible.
  • Tuesday’s $30 bln 3y note auction drew 0.715% and a solid 3.42x bid/cover. A solid indirect takedown (42.0%) helped offset the weak direct bid (16.6%). Primary dealers were left with just 41.4% of the supply.
  • Wednesday’s $24 bln 10y note auction drew 2.795% (2.800% when issued) and a light 2.54x bid/cover (12-auction average 2.70x). A strong indirect takedown (49.7%) helped offset the weak direct bid (16.2%).
  • Thursday’s $13 bln 30y bond auction drew 3.690% (3.700% when issued) and a weak 2.27x bid/cover. A solid 45.2% indirect takedown helped offset the disappointing 13.9% direct bid.
  • Selling had the biggest impact on the belly of the curve as the 5y added +7bps to finish the week @ 1.525%. Traders will be watching the 1.550% resistance level over the coming days.
  • The 10y tacked on +7bps, closing the week @ 2.746%. The benchmark yield is +16bps off its February 3 low, and is now contending with resistance in the 2.750% area that is helped by the 100 dma.
  • Outperformance at the long end saw the 30y tack on +4bps, ending the week @ 3.700%. Treasury bears will have a difficult time running the 30y above 3.760/3.800% resistance as both the 50 and 100 dma rest in the area.
  • The front of the curve saw a slight inversion early in the week as debt ceiling fears developed. However the curve normalized once Congress reached a deal.
  • This week’s selling swing the yield curve steeper as the 2-10-yr spread widened to 242.5bps.

Macroeconomic Data (upcoming)

FF-Cal

Market Commentary

Cyclically, Week 7 is as per my expectations for the week; largely consolidation to a bullish tune. Technically, the markets are also inching towards, if not breaking out of, their respective all time high. This will certainly take affirmation from the bulls to pull of such a move in the week (s) to come. With that being said, I am sticking to my market call for the week.

Direction for Week 7 – UP