Market Analysis and Summary
The NASDAQ, S&P 500, Russell 2000 and DOW all closed below their 50-DMA’s to end last week. The last time all four of these indexes were simultaneously trading below this major moving average was just prior to the 2016 presidential election. While it is entirely possible for these major indexes to do a quick about face and reclaim their 50-DMA’s from here, they also might not. Hence, this is a clear sign to exercise caution.
Leading stocks in the financial sector, were among the first out of the gate when the market gapped up and began its post-election rally. However, many of the big, liquid leaders in this group broke below their 50-DMA’s over the prior several weeks and have been trending lower since. As we discussed in the last report C, JPM, WFC and PNC, all reported earnings on Thursday before the open. C, JPM and PNC all began the session on a positive note, but by the closing bell, they had all reversed course and closed near their lows for the day as volume expanded. WFC was the weakest of the bunch. It gapped down at the open, finished the session on dead lows and closed below its 200-DMA, as volume expanded to 178% above average.
In a similar manner to the financial stocks, leading steel and other metals stocks also began to move powerfully higher with the general market after the Trump administration took over the White House, although have also started to break down. X, NUE, STLD, AA, CLF and VALE are several of these names.
Leading stocks in the semiconductor area of the market have begun to struggle as well. Some of these include NVDA, AMD, TSM, MRVL and AVGO. Overall, semi stocks are holding up better than the financials and metals, but they should be watched closely for further, potential deterioration. One could point to the fiber optic stocks such as AAOI and LITE which went from hot to not over the last few weeks, but this group is made up of a total of fourteen names and at most, only two or three were of any interest.
On the bright side, there are still plenty of healthy and constructive looking stocks in the technology, medical/biotech, building, retail restaurant and other groups. Nevertheless, as we’ve discussed previously, a short to medium term correction from here would not only be considered healthy and normal, but welcome. Remember, corrections in the general market are when the next round of potential leadership has the time to form constructive bases, breakout and lead the market back to new highs.
While we wait to see how this all plays out, discretion remains the better part of valor. Use this time to make lists of the highest quality growth stocks that are building constructive bases and exhibiting the greatest relative strength. Except for positions with big cushions of profit, that haven’t triggered trailing sell stops, we would keep exposure to a minimum and always keep in mind, cash is a position. On the other hand, things can change very quickly, so always have your alerts set and be ready for anything.
NOTE: The entry areas discussed in the charts below are either for very active traders, or for when the pressure comes off the general market and leading growth stocks are breaking out again.
The NASDAQ fell 0.53% and closed below its 50-DMA as volume declined.
The Russell 2000 fell 1.03% as volume declined, but managed to close at logical support.
The S&P 500 fell 0.68% as volume on the NYSE picked up slightly and closed well below its 50-DMA.
The DOW fell 0.67% as volume declined and closed well below its 50-DMA.