|technical analysis, trading systems, investing, market-timing methods, stock market, money management
Technical Market Indicators
Dow Theory, W.D. Gann, MetaStock, system tester, indicator builder, custom formulas, momentum, overbought, oversold, buy, sell, signals, top, bottom, Bull, Bear, consolidation, sentiment, contrary opinion
January 24, 2022
Preview from my weekly report*
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Respect the downtrend.
The S&P 500 price index fell 5.68% last week, its largest weekly decline in 22 months, since 3/20/2020. Stock prices have declined for 3 consecutive weeks. Leading technical indicators have been warning of bearish divergence for many months, offering early warning of a downturn in stock prices, and they remain bearish.
Wall Street analysts generally expected corporate earnings reports this month to be strong, providing catalysts to send stock prices higher, but it appears that their expectations may have been overly optimistic. For example, Netflix (NFLX) stock price fell 22% after a reporting disappointing subscriber growth, JP Morgan Chase (JPM) fell 15% after reporting higher expenses and slower trading activity, and Goldman Sachs (GS) fell 17% after reporting lower equities trading revenue and higher compensation and benefits expenses. Overly optimistic analysts' expectations appear to have exacerbated market risk when actual reports disappoint projections.
Seasonal tendencies based on historical performance for the week ahead suggest volatile, choppy stock price fluctuations up and down.
Sentiment indicators currently appear oversold for the short term. Note that when downside momentum is as powerful as it currently is, markets can fall to deeper oversold readings. From a longer term perspective, bullish sentiment was far above average for 19 months, in a persistent overbought position from April 2020 to November 2021. It could take much more time to work off those longer-term, persistent levels of overbought Greed.
The list of market risks for 2022 has been growing and currently includes the following:
--The Federal Reserve is expected to reduce monetary stimulus, leading to rising interest rates and higher discount rates applied to asset price valuations, which could put downward pressure on stock prices.
--High hopes based on COVID vaccinations appear to have faded in the face of breakthrough infections, case number spikes, and possible new variants.
--The U.S. and global economies continue to find it difficult to fully recover from COVID disruptions.
--Prospects for further massive fiscal stimulus appear to be fading.
--The prospect of rising tax rates to partly offset multi-trillion dollar deficit spending.
--Rapidly rising debt levels.
--Consumer Confidence Expectations Indexes are weak, suggesting economic weakness ahead.
--Our Colby Economic Expectations Index appears to have peaked. Actual economic data releases have been weaker than economists' estimates since June, 2021.
--Inflation has been higher and more persistent than the authorities expected.
--Supply chain disruptions may continue or possibly worsen.
--The pace of economic and earnings growth appears likely to slow down.
--Domestic manufacturing sold off to China.
--Shortage of skilled and willing workers.
--Declining birth rates and declining labor force participation rates.
--Rising drug use, suicides, and gun violence.
--Divisive politics, social justice, inequality, climate change, energy crisis, green new deal, etc.
--Geopolitical tensions appear to be rising, with Ukraine, Russia, Iran, and China the most obvious current hot spots--and there are other possibilities.
--Wall Street expectations and stock allocations have been overly optimistic for many months, leading to an overvalued stock market.
--Financial Stress has been risen since 6/25/2021.
--Stocks remain overbought and overvalued relative to traditional measures: sales, earnings, dividend yields, and book value.
--Stocks still appear to priced for an extremely optimistic future, ignoring all potential bumps in the inherently unpredictable road ahead.
--Berkshire Hathaway's Charlie Munger thinks stock valuations are "crazier" now than they were in the dot-com bubble in years 1999-2000.
--History shows that overly high stock prices are followed by low returns, and overpaying for stocks is not profitable in the long run.
The SPDR S&P 500 ETF Trust (SPY) price fell below its own trailing 200-day SMA (simple moving average) last week for the first time in 19 months, since June, 2020. Crossing below the 200-day SMA is widely considered to signal a longer-term downtrend that can last a few months, sometimes longer. Prices can move 10%-20% or more after such a signal. Leading technical indicators, RSI, MACD and OBV (On-Balance Volume), have completely collapsed after giving plenty of early warning by diverging bearishly compared to price for months. Many other market indicators (shown below) persistently have shown negative divergences relative to the SPY.
The Invesco S&P 500 Equal Weight ETF (RSP) has outperformed the SPY since 12/1/2021. Leading technical indicators based on the trend of price (RSI, MACD and OBV) are not bullish, however. The lesser weight of the big-capitalization technology stocks (which have been relatively weak since 12/1/2021) has helped the equal-weight RSP outperform the big-cap SPY somewhat. Given that a trend of rising interest rates should be negative for big-cap technology stocks, RSP could be in position to continue to outperform the SPY this year. Note that potentially better relative performance does not imply positive absolute performance, and so RSP still could lose, but lose less than SPY.
The Cumulative Daily Advance-Decline Issues Line for the NYSE ($NYAD) collapsed to its lowest level since May, 2021, and continues to diverge bearishly compared to the SPY. Even when the SPY price rose in December and into January, $NYAD remained well below its peak on 11/8/2021, so it remained relatively weak compared to the SPY price. Therefore, $NYAD indicated a bearish divergence compared to the SPY. Relative weakness in the A-D Line indicates that the demand for the typical stock has been lacking.
Net New Highs on the NYSE ($NYHL, now at -517) fell to the lowest level since March, 2020, indicating an extremely bearish trend. Peaking last May, $NYHL signaled early warning bearish divergences compared to stock index prices for most of year 2021.
The QQQ Nasdaq 100 ETF (QQQ) price index, which is heavily weighted by technology stocks, underperformed the SPY since 12/1/2021. Leading technical indicators, RSI, MACD, and OBV (On-Balance Volume), fell below their lowest levels in more than 6 months after giving early warning bearish divergences compared to price since peaking in November. Not at all a pretty picture.
The Cumulative Daily Advance-Decline Issues Line for the NASDAQ ($NAAD) completely collapsed to its lowest level in 21 months, since April, 2020, and continues to diverge bearishly compared to the stock price indexes. $NAAD has been notably weak since 11/8/2021 and has been significantly weaker than the QQQ price since it peaked nearly a year ago on 2/9/2021.
Net New Highs on the NASDAQ ($NAHL, now at -1293) fell to the lowest level since March, 2020, indicating an extremely bearish trend. Peaking last February, 2021, $NAHL signaled early warning bearish divergences compared to stock index prices for more than 10 months.
The Russell 2000 ETF (IWM), which is composed of relatively small-capitalization stocks, underperformed the SPY again last week. On 1/19/2022, the trailing 50-day SMA (simple moving average) crossed below the 200-day SMA to signal a major price downtrend. Leading momentum indicators of price, RSI, MACD, and OBV, are at or below their worst levels in a year and remain bearish. There is no evidence of any change in the IWM's well-established underperformance trend relative to the SPY. The January Effect traditionally favors small caps outperforming large caps from mid-December through February, although that does not happen every year, and it is absent so far in 2022.
The Dow Jones Averages both crossed below their own trailing 200-day SMAs (simple moving averages) last week. Crossing below the 200-day SMA is widely considered to signal a longer-term downtrend that can last a few months, sometimes longer. Prices can move 10%-20% or more after such a signal. The Dow Jones Transportation Average underperformed the Dow Jones Industrial Average since 11/2/2021 and failed to confirm the new closing price high by the Dow Jones Industrial Average on 1/4/2022, signaling a non-confirmation, which suggests market divergence, where the two Averages fail to pull together in the same direction. Non-confirmations often appear at turning points in a trend. Next, it would be bearish if the Industrial Average closes below its closing price of 34,022.04 on 12/1/2021, thereby confirming the breakdown in the Transportation Average below its low on 12/1/2021.
Our full report reviews indicators that we monitor every day and 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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Analysis of market forces may offer a sense of probabilities. But the many variables that can impact market prices are notoriously difficult to predict. And, market analysis is something less than an exact science. So, sound trading tactics are always recommended. See my Money Management Rules.
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