Market Recap for January 11, 2016
Monday was a bifurcated market in which we saw both the Dow Jones and S&P 500 rise for the session while the underperforming NASDAQ extended its losing streak to start the year. Both the NASDAQ and Russell 2000 have fallen more than 10% since their respective December 29th finishes. It's been a mass exodus out of stocks, especially those carrying higher than normal risk. The NASDAQ has dropped eight consecutive sessions as traders run for the exits. The silver lining here is that despite all of the selling, the long-term uptrend remains intact with earlier lows in October 2014 and August 2015 holding thus far. Here's a look at where the NASDAQ stands in terms of long-term price support:
Important bottoms are found with huge spikes in the VIX because it's a signal that traders are throwing in the kitchen sink. Bottoms established under that kind of duress tend to be game-changing support levels. The huge August spike in the VIX accompanied a price low that nearly tested key support just above 4200. Should the NASDAQ fail to hold 4500 (closing support on daily chart not shown above), it'll likely be a very quick trip to 4200 and that would be a scary drop on top of what we've already experienced.
In addition to the bifurcated action on our major indices yesterday, our sectors were quite mixed as well. Both consumer sectors - staples (XLP) and cyclicals (XLY) - performed well and led the action while both technology (XLK) and utilities (XLU) followed suit. Those latter two represent both aggressive and defensive areas of the market, respectively.
Pre-Market Action
Today will be a fairly significant one. First, U.S. futures are up nicely, continuing strength in Europe early this morning. The French CAC, London FTSE and German DAX are all up in the 2.0%-2.5% range this morning, providing a bit of relief to battered global markets. The question here, of course, will be whether the gains stick. Global markets are oversold so it would help to see relief for more than just one day. We saw a brief end-of-day rally on Monday and it appears that uptrend will continue into the open today. A second reason that today will be big is that a critical railroad stock (CSX) reports its earnings after the closing bell today. While its most recent quarter will be scrutinized, it will be more important to hear their future guidance and how the market reacts to it tomorrow. The group (DJUSRR) has been crushed, peaking at just over one year ago near 1600. With Monday's close of 968 and long-term price support approaching near 900, I expect the news and guidance to be poor. However, CSX does have technical hope in that it currently boasts a long-term weekly positive divergence. If CSX holds up after its earnings report, the majority of the bad news could already be factored in the stock's price. Here's the long-term chart:
One word of caution here. Positive (and negative) divergences can be eliminated with further erosion in price. However, a gap down with earnings and subsequent recovery on heavy volume could begin the process of technical repair. It will be interesting to see how CSX reports - and more importantly - how the market reacts to it.
Current Outlook
There haven't been too many areas of the market to be spared this year thus far. Consumer staples (XLP) has been one sector, though, as their losses to open 2016 (less than 1% loss) pale in comparison to most other areas. For instance, in the past week, energy (XLE) and materials (XLB) have dropped 9.04% and 7.86%, respectively. The four key aggressive sectors - financials (-5.31%), industrials (-4.88%), technology (4.54%) and consumer discretionary (-3.42%) - have taken more than their fair share of the selling. We're due for a bounce as our major indices are short-term oversold and we're approaching key long-term price support. On any bounce, if I trade on the long side it will likely be geared more towards defensive stocks. Tobacco ($DJUSTB) and distillers ($DJUSVN) have both moved HIGHER over the past week, bucking the selling trend. Apparently, traders feel like smoking and drinking may be our only growth industries given economic conditions (okay a bit of sarcasm there).
But seriously, the DJUSVN was in breakout territory two days ago. Check out this bullish pattern:
After looking at this chart, you might wonder, "what market selloff?" But money outflows from aggressive sectors and industry groups are finding a home here. A symmetrical triangle following an uptrend is generally a bullish pattern that resolves itself in the direction of the prior trend. Clearly, the prior trend was higher. While no equity position is "safe", this group is defensive and might make sense for those who want exposure to equities but don't want to take on the risk associated with higher beta stocks.
Sector/Industry Watch
I highlighted the distillers above as a very bullish looking industry group. Now let's take one that has completely fallen apart - home construction ($DJUSHB). Check out the chart:
The candle from last week is very damaging technically as it violated price support close to 550 from the ascending triangle breakout. And note that on prior lows (black arrows), weekly RSI held 40 support. Currently, the weekly RSI is at 37, a level not usually seen during long-term uptrends. The last line in the sand appears to be the uptrend line that began during that bullish ascending triangle pattern. That trendline also is very close to the rising 200 week SMA. Therefore, it appears that the 480-500 level is a must hold to maintain bullish hopes here.
Historical Tendencies
The selling we've seen to open up 2016 has been unprecedented on the NASDAQ. In 1978, the NASDAQ opened up with a six day losing steak and fell roughly 6% over that period. The 2016 version, however, began with a two day losing streak from 2015 and has been more significant in terms of percentage losses. The good news? The NASDAQ finished 1978 higher. That seems like a very small consolation prize at the moment.
Key Earnings Reports
(reports after today's close, estimate provided):
CSX: .46
Key Economic Reports
None
Happy trading!
Tom
