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February 21, 2020
Stock Market: is a downside correction at hand?
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RSI and MACD oscillators rolled over to signal a downside correction, after failing to confirm the higher high by the S&P 500 on Wednesday 2/19/2020.
The S&P 500 price index (now at 3337.75) rose to a new all-time closing price high on Wednesday 2/19/2020, but it could not hold on to its gains and closed 1.25% lower for the week.
Long term, the S&P 500 has remained consistently systematically bullish since 10/10/2019, when price moved above both the 50-day SMA (now at 3274.01) and 200-day SMA (now at 3041.55), and with the 50-day SMA above the 200-day SMA. (SMA means Simple Moving Average of price over the most recent n days.) Keep in mind that trend following using moving averages always lags at price turning points.
The Dow Jones Industrial Average rose to a new all-time closing price high of 29,551.42 on Wednesday 2/12/2020, but the Transportation Average fell short of its closing price high on 1/16/2020 at 11,304.97 by 2.41% in February. The failure of the Transportation Average to confirm the higher high by the Industrial Average is known as a non-confirmation, which is a warning that not all parts of the stock market are in gear and pulling together in the same direction.
The Cumulative Daily Advance-Decline Line for Common Stocks Only Listed on the NYSE peaked on 1/17/2020 and shows a bearish divergence this month compared to the S&P 500. It rolled over on Friday, suggesting a downside correction.
The Cumulative Daily Advance-Decline Volume Line also peaked on 1/17/2020. It is indicating a downside correction by making lower highs and lower lows.
Investor sentiment weakened to neutral from bullish complacency.
Historically, stock market seasonal tendencies have been mixed for the month of February. Seasonal tendencies easily can be overwhelmed by news headlines as well as price momentum.
Economic reports have been better than expected in recent months, surprising the consensus of economists. It is highly uncertain, however, whether the coronavirus global health emergency could have the potential to significantly dampen economic activity going forward from here.
Easy monetary policies of the global central banks have been and remain bullish for the financial markets.
Long-term U.S. stock sector rotation shows some movement toward Defensive sectors and away from Cyclical sectors in February, indicating investor caution about long-term economic prospects. The following best-performing sectors are demonstrating the greatest trend strength: Technology, Health Care, Communication Services, Financial, and Utilities. Cyclical sectors such as Technology tend to rise and fall in anticipation of the ups and downs of the general business and economic cycle.
The following sectors are relatively weak for the long term: Energy, Real Estate, Materials, Consumer Staples, and Consumer Discretionary. Cyclical sectors such as Materials and Consumer Discretionary tend to rise and fall in anticipation of the ups and downs of the general business and economic cycle.
Foreign (EFA) and Emerging (EEM) stock markets fell further below their 50-day SMAs last week. Both remain above their 200-day SMAs and remain systematically neutral. Both have underperformed U.S. stock indexes for the past 25 months since 1/26/2018. Foreign markets are important because they have led the U.S. stock market at important price turning points in recent years.
The U.S. Dollar ETF (UUP) fell sharply after hitting upside resistance on Friday but still held on to part of its gains from earlier in the week. UUP remains systematically neutral. UUP may benefit from safe haven money flows.
Gold (GLD), Gold Miners (GDX), and Silver (SLV) rose strongly last week and remain systematically bullish. Precious metals are safe havens that some investors switch into when they become fearful.
Copper (JJCTF) finished nearly unchanged last week . Copper is systematically neutral, with price below both its 50-day and 200-day SMAs and with the 50 nearly at the 200 last week. The price of Copper is sensitive to prospects for global economic growth, which some investors fear may be dampened by the possible spread of coronavirus.
Oil (USO) price recovered modestly over the past two weeks, following severe weakness in January. USO remains systematically neutral, below its 50- day SMA and below its 200-day SMA. The declining 50 SMA is moving down toward the 200 SMA--a cross below would be systematically bearish, but the 50 SMA remains above the 200 SMA at this time. USO traded in a wide trading range between 7.67 and 16.27 since bottoming on 2/11/2016.
U.S. Treasury bond (TLT) and U.S. Treasury notes (IEF and SHY) prices rose strongly last week and remain systematically bullish. IEF set a new high. TLT remains below its 148.90 high on 8/28/2019. SHY remains below its 85.12 high on 8/28/2019. U.S. Treasury bonds and notes are safe havens that some investors switch into when they become fearful.
$VIX Volatility Index rose to an above-average and somewhat oversold level of 18.21 intraday on Friday, down from an above-average and oversold level of 19.99 on Friday 1/31/2020, and up from a below-average and overbought 12.10 on 1/17/2020.
The AAII investor sentiment survey remains overbought, now with 40.56% Bullish, 30.77% Neutral, and 28.67% Bearish. The Bullish plus Neutral percentage of 71.33% is up from a moderate 63.14% three weeks ago, but down from an extremely overbought 79.53% on 12/19/2019.
The Equity Put/Call Ratio remains overbought, averaging 0.56 last week, which is below the 200-day average of 0.62. Options speculators typically react to the price action: when stock prices go up they trade more calls, and when stock prices go down they trade more puts. The Art of Contrary Thinking would suggest becoming more bullish as this P/C ratio rises toward extremely high levels and more bearish as it falls to extremely low levels.
The CNN Money Fear & Greed Index declined to the neutral 40-60 range in recent weeks, down from overbought and extremely greedy levels in the 90-100 range in January, 2020. For details, see http://money.cnn.com/data/fear-and-greed/
The full report offers clear and unbiased guidance on the following each week:
Global stock markets
The Defensive stock sectors
The Health Care sector
The Cyclical sectors
The Technology sector
The Financials sector
U.S. bonds and notes
Commodities (Oil, Metals, Agriculture)
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