Even though earnings from Snap dampened the gains last week it was the most encouraging stock market action in a month. The 39% plunge in SNAP carried over to other tech giants as Meta Platforms was down 7.6% and Alphabet declined 5.6%. both report earnings this week.
Two weeks ago it was my view that the stock market rally had further to go but the recent market gains have only had a slight change in the very high bearish sentiment. So far 21% of the S&P 500 stocks have reported earnings and according to FactSet, 70% have beaten analysts’ forecasts.
The 1.8% decline in the tech-heavy Nasdaq 100 on Friday likely encouraged those who are looking for another sharp market decline. The S&P 500’s failure to significantly overcome the 4000 level will likely be used as further evidence that the “so-called” bear market rally is already over.
Is that possible? Of course, it is but does the technical evidence indicate it is just a bear market rally?
The Dow Jones Transportation Average led the averages last week gaining 4.5% followed by a 3.7% gain in the iShares Russell 2000 ETF. Even after Friday’s decline, the Nasdaq 100 Index was still up 3.%. On a year-to-date basis (YTD) it is still the weakest, down 24% compared to a 12.2% YTD decline in the Dow Jones Industrial Average.
MORE FOR YOU
The S&P 500 had a solid gain of 2.6% as the intra-day analysis of the S&P futures turned positive last Tuesday (see Tweet) and stayed positive for most of the week. The SPDR Gold Shares (GLD GLD ) was up 1% while the Dow Jones Utility Average lost 0.2%. It was a strong week for the market internals as on the NYSE there were 2690 issues advancing and just 836 declining.
Let’s look at why I think the rally is not over yet and what the market needs to do to signal further gains as we start an important week of earnings and the expected FOMC rate hike.
For the past month, I have been noting the improvement in the advance/decline numbers, especially for the Nasdaq 100. At the end of June (Don’t Count on Another Rally Failure) I pointed out that the weekly Nasdaq 100 Advance/Decline line had formed the first bullish divergence since 2009 (see chart).
Let’s look at the weekly chart now. From a low of $269.28, the Invesco QQQ QQQ Trust (QQQ) closed Friday at $301.99 after a high of $308.55. On a short-term basis, a close above this level would support the bullish case. The 38.2% Fibonacci resistance from the late 2021 high is at $322.54 with the 50% at $339. The weekly downtrend, line a, falls in between these levels at $331.96. A weekly close below $275 would turn the intermediate trend negative.
The Nasdaq 100 Advance/Decline line was strong last week confirming the break of the downtrend line c, as it moved well above its WMA. In late June while prices were forming lower lows, line b, the A/D line was forming a higher low, line d. A move above the late May high will confirm this divergence.
The relative performance (RS) dropped below its WMA at the end of the year. This measures how an ETF or stock is performing relative to the SPX not whether its trend is positive or negative. This was a sign that QQQ was going to be weaker and as the table above indicates it as dropped over 7% more than the S&P 500 YTD.
There are signs now that this relationship has changed as the RS has broken its long-term downtrend, line e, and moved above its WMA. QQQ needs to be stronger than the SPX over the next few weeks to confirm it is now a market leader.
The Spyder Trust (SPY PY SPY ) does not look as strong technically as the QQQ as it just moved slightly above $400 on Friday before turning lower. The 38.2% resistance is at $407.12 with the 50% at $421.08. The downtrend is in the $440 area. The rising 20 day EMA at $387.67 is initial support. A close below $370, line b, would support the view that this has just been a bear market rally.
The S&P 500 A/D line has risen above the prior two highs but needs to overcome the downtrend, line, d, to signal a stronger rally. If the major downtrend, line c, is broken it would be a sign that the intermediate trend has turned positive. The support at line e, is now critical level that must hold on any decline.
In addition to earnings, there are several key economic reports this week in addition to the FOMC meeting and announcement. They include the Chicago National Activity Index, Consumer Confidence, the first reading on 2nd quarter GDP, and the PCE Inflation Index. All are likely to impact the bond market which has increased the stock market volatility.
There were technical signs that yields were topping out the week ending January 17th, point 1, as the yield on the 10-year T-Note hit a high of 3.483% before closing lower. As was pointed out at the time the MACD and MACD-His both formed negative divergences at the highs, lines b and c.
Both MACDs turned negative three weeks ago and continue to make lower lows. Yields are testing the support at 2.700%. A decline below this level will make the next downside target in the 2.400-2.500% area.
There is plenty to move the markets in the week ahead and while the daily A/D line analysis is positive it is not yet trending higher. If a further decline early in the week is followed by a rally and a higher weekly close it will signal a further rally. Tech and small caps are now likely to lead the averages higher. The intra-day analysis of the S&P futures has been doing a good job of catching the swings both up and down. I will be updating this analysis on Twitter during the week along with the market’s reaction to earnings.