Most investors hoped that January’s record gains would continue for the rest of the year but instead most are happy that February is over. On February 5th, I commented that the recorded call buying three days earlier was “probably a sign that the fear of missing out (FOMO) has gotten too high.” I thought “that the stock market may be ready for a setback’.
The Dow Jones Industrial Average, which had been leading the averages since October, was hit the hardest, down 4.2%. It was followed by a 2.6% decline in the S&P 500 while the Nasdaq Composite was down just 1.1%.
Before Thursday’s down gap open the S&P 500 was already down almost 0.5% for the week. The rebound from Thursday’s lows surprised me and many other analysts as the S&P 500 closed up 1.9% for the week. The Dow Jones Transportation Average was the best performer up 3.3% followed by a 2.7% gain in the Nasdaq 100 Index.
The SPDR Gold Shares (GLD
) were up 2.5% a bit better than the 2.1% gain in the iShares Russell 2000. So far in 2023 both the Nasdaq 100 and the Dow Jones Transportation Average are up over 12% YTD. That is more than double the YTD gain for the S&P 500 and ten times the 0.7% YTD gain in the Dow Jones Industrials.
The market internals reversed last week, closing with 2082 advancing issues and 1167 declining issues. That was in contrast to the prior week when there were three times more declining issues than advancing ones. In last week’s review of the weekly NYSE Advance/Decline line, I commented that “strong NYSE A/D numbers are needed to indicate that the correction is over.”
The NYSE Composite, which is more representative of the common stock, dropped below the 20-week EMA over the past two weeks but then closed above it gaining 1.7%. The January high at 16,222 is now the key barrier on the upside with the weekly starc+ band at 16,721. The two-week low at 15,342 is now the support level to watch.
The NYSE All Advance/Decline line moved through its downtrend, line c, and its WMA in early January (point 1). This positive signal was reinforced by the move above the longer-term downtrend, line b, at point 2. The gap between the A/D line and its WMA four weeks ago was a sign it was extended on the upside. The turn higher this week is a sign that the pullback is over.
The early action Thursday did not indicate a turn higher as the averages traded lower on the open. The Spyder Trust (SPY
) made a new correction low at $392.33 as it came close to the converging 100-day MA (black) and the 200-day (dashed green) before closing higher at $397.81.
The A/D numbers had been negative for most of Thursday but did close positive. SPY gapped higher on Friday and rallied strongly throughout the day to close above the 20-day EMA (red) and the monthly pivot at $402.74.
The S&P 500 A/D line had been below its EMA for the past nine days before turning positive on Friday. It is still below the resistance at line b. The NYSE Stocks Only A/D line had been stronger than the S&P and it closed above its downtrend, line c, signaling an end to the correction. The daily NYSE All A/D line has also completed its correction as it moved through the resistance at line d. It would now take a drop below the recent lows to turn these A/D lines negative.
By 1:15 PM Friday (see Tweet) it was quite evident that the daily A/D lines were going to turn positive as the NYSE All A/D numbers were almost 5-1 positive. This was a sign that it was time to add to long positions in stocks and ETFs. One of the ETFs I favored was the iShares MSCI EAFE Index (EFA
) that has 796 holdings and a yield of 2.44%.
EFA closed up 2.7% last week and it appears that the correction from the January high at $72.44 is over. The 61.8% Fibonacci resistance at $71.72 was overcome on the prior rally which was a sign the major decline was over. The weekly starc+ band is at $74.65 with additional resistance in the $78-$80 area.
EFA was favored because of its relative performance RS analysis as the downtrend from 2021, line a, was overcome at the end of 2022. This indicated it was a new market leader. The volume increased last week consistent with the end of a correction. The OBV is holding above its WMA and support at line b.
Another market-leading ETF is the iShares Dow Jones US Home Construction (ITB
) which moved above its weekly starc+ band five weeks ago which indicated it was ready for a pullback. The stock market bears, many of whom look at the markets from a fundamental standpoint, have little explanation for the strength of ITB. Many have proclaimed the death of the home building industry since last year but ITB completed a bottom early in the year by moving above the resistance at line a.
ITB was up 2.5% last week as the pullback has held so far well above its rising 20-week EMA at $64.15. The initial upside targets are in the $74 and then the $78-$80 area. A close above the new monthly pivot at $69.13 this week will further support the bullish case.
The weekly RS moved through resistance, line a. in early December indicating it was a market leader. It has held well above its rising WMA as prices have pulled back. The on-balance-volume (OBV) closed just below its WMA and needs a move the resistance at line c, to confirm a bottom.
The yield on the 10 -Year T-Note declined on Friday after coming close to the daily starc+ band on Thursday. This put some pressure on the US Dollar and helped boost the metals and crude oil. The MACDs have reached the downtrend from the October highs so the move higher in yields could be stalling. The MACD-His is still positive but has formed lower highs (see arrow) as it has diverged from prices.
The daily analysis of the E-mini S&P Futures also indicates that the decline from the February high at 4207.50 is over with Friday’s gain. The projected upside targets are at 4171.8 and then 4237.8. A move above the February high, without a test of the October lows, is likely to change the view of many bearish Wall Street strategists.
The monthly pivot in purple is at 4042 with the 20-day EMA at 4034 and would look for some consolation by mid-week. There is good support in the 4000 area. The StoConf, Jerry A’s modification of George Lane’s stochastics, has turned positive after dropping below the green zone and the lower regression channel.
If the averages close higher for the next several weeks and reach the resistance in the 4140 -4160 area we are likely to see more investors again develop a fear of missing out (FOMO) as they did early in February. I would suggest that you continue to favor stocks and ETFs that are leading the S&P 500 based on the relative performance analysis. more news