Market Recap for Thursday, April 7, 2016
It was a rough day yesterday. All of our major indices were down. All nine sectors were lower. Unless you were trading gambling stocks or mining for gold, you probably saw red numbers. The selling was truly across the board. But there was a silver lining in there. We have seen 20 day EMAs hold as support on our major indices throughout the rally off the February 11th bottom and they did so again on Thursday. For the bears, closing the market below those rising 20 day EMAs is job #1 because you cannot begin to muster a bear attack with prices remaining above critical short-term support. The Dow Jones, S&P 500 and Russell 2000 all hit their 20 day EMAs during Thursday's rout, but all three closed above that moving average. Here's the visual of the Dow Jones:
The red shaded area shows a resistance zone where rallies have died since the heavy volume August selling. The Dow Jones was beginning to test that price resistance zone when the negative divergence emerged, signaling slowing momentum to the upside. That's key here because the rising 20 day EMA has continually offered solid support for the bulls while momentum was accelerating to the upside. Now it's being challenged, but with slowing momentum more apparent.
The worst hit areas of the market on Thursday were the financials (XLF) where banks ($DJUSBK) fell by 2.77% and lost key support. For a more detailed look at the banks, see the Sector/Industry Watch section below.
Pre-Market Action
U.S. futures are primed to rebound and recoup some of Thursday's losses at this morning's opening bell. It's helping that Germany has bounced off key price support near 9500. In fact, all of the major European indices are higher this morning, most up more than 1%. At last check, the German DAX was 1.43% higher.
Asian markets were mixed overnight with China's Shanghai ($SSEC) back below the 3000 level. Clearly, the worst performer in Asia has been in Tokyo where the Nikkei ($NIKK) had fallen six consecutive sessions before posting very slight gains the past two sessions including overnight when the NIKK rose .46%. Still, the NIKK had dropped nearly 1500 points in two weeks and that's not helping global sentiment.
The 10 year treasury yield ($TNX) closed beneath 1.70% on Thursday for the first time in 5-6 weeks, indicative of traders' appetite for safety, but it's rebounded a bit this morning to 1.73% so the bond market is at least supporting a move higher in equities today. If the TNX fails to sustain this move higher, then equities are also likely to lose their luster as well.
Current Outlook
One change that took place on Thursday was the sudden rise in the Volatility Index ($VIX). A rising VIX is key for the bears as big selloffs require the market environment to turn much more cautious and fearful. The VIX has been downtrending since the S&P 500 bottomed on February 11th, making it difficult for any selling to stick. The move higher in the VIX on Thursday, coupled with a potential loss of rising 20 day EMAs on our major indices might be the recipe the bears have been looking for to regain control of the action. Take a look at the latest view of the VIX:
A declining VIX is a bulls best friend. Unfortunately, the VIX seems to have taken a turn higher as April arrived and it's the rising VIX environment that could lead to further selling of U.S. equities. We already know that momentum is slowing based on the negative divergences that have appeared on daily MACDs (coinciding with the 60 minute negative divergences we saw earlier this week). We also know that money has been rotating more towards defense since mid-March. Now we're seeing the sudden rise in the VIX. The analogy I always like to use when forecasting negative stock market action is that of forecasting a tornado. When we have sunny market skies (sustainable rally with money flowing to all the right places), the likelihood of a market tornado is significantly diminished. But when the market skies turn ugly (improper rotation, increased fear, negative divergences, etc.), you need to be prepared to take shelter if a market tornado hits.
Right now, I see a funnel cloud but it's yet to touch down.
Sector/Industry Watch
Banks ($DJUSBK) are a big problem. They're simply not supporting the recent rally and it's important for banks to remain healthy because they are truly the engine that makes a bull market run. Our economy is dependent on credit availability and when banks begin to underperform, it's a sign there could be economic troubles ahead. We already know that many banks are hurting because of exposure to energy companies. And the beauty of technical analysis is that every piece of known information is included in stock prices. So when stock prices begin to move lower, it's fairly obvious there are concerns that we should be aware of, even though we might not know the reasons for the concerns.
Below is a look at the DJUSBK:
A few things here. First, the DJUSBK had not closed below 280 since late February, but it closed there Thursday. Second, mid-March seemed to be the turning point as it's been with several other indicators and relative ratios. Finally, banks broke down from a bearish wedge and their relative weakness vs. the S&P 500 has accelerated to fresh new lows. This just doesn't smell like bull market action to me.
Historical Tendencies
After today, the S&P 500 tends to struggle leading up to the April 15th tax deadline. Here are the annualized returns for today and the next several days through April 14th:
April 8th (today): +48.71%
April 11th (Monday): -23.02%
April 12th (Tuesday): +76.97%
April 13th (Wednesday): -35.73%
April 14th (Thursday): -8.93%
April 15th through April 18th show very strong historical returns.
Key Earnings Reports
None
Key Economic Reports
February wholesale trade to be released at 10:00am EST: -0.2% (estimate)
Happy trading!
Tom
