Market Week In Review - 3/8/2021 - 3/12/2021
The Market Week in Review is my weekend homework where I look over what happened in the previous week and what might come in the next week. It helps me evaluate my observations, recognize new data points, and create a plan for possible scenarios in the future.
I do occasionally have some errors or typos and will correct them in my blog or in the comments on TradingView. I do not have an editor and do this in my free time.
If you find this helpful, please let me know in the comments. I am also more than happy to add new perspectives and data points if you have ideas.
The structure is the following:
If you have been following my daily updates, you can skip down to the “The Meaning of Life”. If not, then this first part is a great play-by-play recap for the week. Click the original charts for more detail each day.
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Monday, March 8, 2021
Facts: -2.41%, Volume lower, Closing range: 2%, Body: 73%
Good: Held above 12,600 as market closed
Bad: Could not hold short rally in morning, selling the rest of afternoon
Highs/Lows: Higher high, higher low
Candle: Short upper wick over a thick red body, no lower wick
Advance/Decline: More than one declining stock for every advancing stock
Indexes: SPX (-0.54%), DJI (+0.97%), RUT (+0.49%), VIX (+3.28%)
Sectors: Utilities (XLU +1.41%) and Materials (XLB +1.34%) were the top sectors. Communications (XLC -1.34%) and Technology (XLK -2.42%) were bottom.
Expectation: Lower
The rotation continues. It's not often that a rotation is so clearly seen, with the Dow Jones ending the day up nearly 1% and the Nasdaq ending the day down 2.41%. Nine sectors outperformed the broader S&P 500 index, while the other two sectors lost enough to bring down the index for a loss by the end of the day.
The Nasdaq closed the day with a -2.41% loss on lower volume. The closing range of 2% followed an afternoon of selling that formed the 73% red body underneath a small upper wick from the short morning rally. There were more declining stocks than advancing stocks.
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Tuesday, March 9, 2021
Facts: +3.69%, Volume higher, Closing range: 71%, Body: 56%
Good: Good gain on higher volume, higher high, higher low, above 13k
Bad: Selling in last hour of day
Highs/Lows: Higher high, higher low
Candle: Slightly longer upper wick with a thick green body
Advance/Decline: Two advancing stocks for every declining stock
Indexes: SPX (+1.42%), DJI (+0.10%), RUT (+1.91%), VIX (-5.65%)
Sectors: Consumer Discretionary (XLY +3.78%) and Technology (XLK +3.40%) were the top sectors. Financials (XLF -0.91%) and Energy (XLE -1.75%) were bottom.
Expectation: Sideways or Higher
The rotation reverses. Today saw a reversal of the past several days rotation as money flooded back into big tech, consumer discretionary, and growth stocks. Treasury bond yields seemed to stabilize a bit allowing investors to turn their eyes on the stimulus and the impact it will have on performance in the near term.
The Nasdaq closed with +3.69% gain on higher volume. The closing range of 72% came after some selling in the final hour of trading, forming the upper wick. The green body covers 56% of the candle and represents a day that was dominated by the bulls. There were two advancing stocks for every declining stock.
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Wednesday, March 10, 2021
Facts: -0.04%, Volume lower, Closing range: 14%, Body: 69%
Good: Higher high, higher low, support above 13,000
Bad: Rejection off 21d EMA in morning led to selling and close near low
Highs/Lows: Higher high, higher low
Candle: Thick red body with small upper and lower wicks, low closing range
Advance/Decline: More advancing stocks than declining stocks
Indexes: SPX (+0.60%), DJI (+1.46%), RUT (+1.81%), VIX (-6.12%)
Sectors: Energy (XLE +2.53%) and Financials (XLF +2.04%) were back on top. Technology (XLK -0.40%) was bottom.
Expectation: Sideways or Lower
The rotation settles. There was still signs of rotation in the market today, with the sector list flipping once again. But the effect is much more subdued than the past week. The passing of the stimulus has investors eyes wide open while they sent the Dow Jones Industrial to all-time highs.
The Nasdaq was not able to benefit from the enthusiasm as it declined -0.04%. A sideways move, but still a day marked by selling after a morning gap-up. The closing range of 14% is underneath a thick red body of 69% and slightly longer upper wick formed just after the market opened. There were more advancing stocks than declining stocks, however volume on declining stocks was higher.
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Thursday, March 11, 2021
Facts: +2.52%, Volume lower, Closing range: 81%, Body: 67%
Good: Another higher high and higher low, back above 21d EMA and 50d MA
Bad: Not much, resistance at 13,400
Highs/Lows: Higher high, higher low
Candle: Thick red body with small upper and lower wicks, low closing range
Advance/Decline: Almost three advancing stocks for every declining stock
Indexes: SPX (+1.04%), DJI (+0.58%), RUT (+2.31%), VIX (-2.88%)
Sectors: Technology (XLK +2.14%) and Communications (XLC +1.89%) were top. Utilities (XLU -0.26%) and Financials (XLF -0.29%) were bottom.
Expectation: Sideways or Higher
The back and forth continues as the Nasdaq and technology stocks rise again. The sector list has flipped back and forth the last several days as investors rotate in and out of big tech and growth stocks. Today, the market rallied as jobs reports showed positive gains in the labor market and the stimulus is proceeding to Biden's signature. Technology was back on top while Financials moved to the bottom.
The Nasdaq closed with a +2.52% gain on lower volume. The 67% green body was formed in the morning as the index quickly rose to intraday highs around 13,400 and stayed there the rest of the day. The short upper wick is above an 81% closing range. There were almost three advancing stocks for every declining stock.
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Friday, March 12, 2021
Facts: -0.59%, Volume lower, Closing range: 97%, Body: 58%
Good: Bulls bought back the morning lows to bring index back above 21d EMA
Bad: Lower high and lower low
Highs/Lows: Lower high, lower low
Candle: Green body above a lower wick with very small upper wick
Advance/Decline: About even advancing and declining stocks
Indexes: SPX (+0.10%), DJI (+0.90%), RUT (+0.61%), VIX (-5.57%)
Sectors: Real Estate (XLRE +1.72%) and Utilities (XLU +1.35%) were top. Communications (XLC -0.28%) and Technology (XLK -0.72%) were bottom.
Expectation: Sideways or Higher
Are you dizzy yet? This rotation just won't end. Every day this week the Technology sector flipped from the bottom of the sector list to the top and then the next day to the bottom. Yesterday it was at the top. Today it's back at the bottom. As long term bond yields are reaching for pre-pandemic highs, investors are still trying to determine the impact on valuations of big tech and growth stocks.
The Nasdaq closed the week with a green candle, but ended the day with a -0.59% decline. Volume was lower but the bulls bought up a morning dip to bring the index back above the 21d EMA in the afternoon. A closing range of 97% means a very small upper wick. The longer lower wick rests underneath a 58% green body. There were about the same number of advancing and declining stocks.
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The Meaning of Life (View on the Week)
It was a wild week of rotation instigated by volatility in the treasury bond markets. Economists and investors weighed the impact of stimulus on inflation, currencies, bonds and equities. The outcomes could have opposite effects on different sectors. Technology and Communications, that have growth mega-caps, could be negatively impacted by higher yields, raising the costs of borrowing money to drive growth. Financials could benefit from the higher yields driving interest rates and additional revenue on both mortgages and commercial borrowing.
The winners from the stimulus bill will be industrials and materials as the economy returns to pre-pandemic levels and these sectors benefit. The market made that clear as the Dow Jones Industrial gained 1% on Monday while the Nasdaq declined -2.41%. Utilities, Industrials and Materials were top sectors along with Financials. All cyclicals, but as the first three would remain steady throughout the week, Financials was up and down depending on bond performance.
But it also seemed no one was quite ready to give up on big tech and growth stocks. Tuesday was "buy the dip" day, sending the Technology sector back to the top of the list. Growth companies like Tesla (TSLA) gained 20%, rebounding off recent lows. The four big mega-caps all closed the day with gains. Financials and Energy moved to the bottom of the sector list. The 3y note auction brought some optimism back to the bond market, bringing yields back down from recent gains.
The 10y auction on Wednesday also brought some confidence back to the bonds market. Yields on treasury bonds pulled back a little. But even as yields came down, the yield curve steepened. A steep yield curve forecasts higher interest rates and could mean other monetary policy changes from the Fed. That's where the fear is focused. Technology moved back to the bottom of the sector list on Wednesday.
A quick refresh on the yield curve. The yield of a treasury bond can be viewed as the level of risk investors see in the bond. Shorter term bonds are paid back quickly and therefore investors usually assign lower risk and therefore require lower yields. Longer term bonds are viewed with higher risk, there's more time between now and the maturity date of the bond for something happening that will impact the value, so yields are higher. Risk/reward.
The yield curve is a plotting of the interest rates from short term to long term.
When the yield curve is normal, there should be an upward sloping curve. From the shortest term bonds to the middle term, yields will accelerate. As you move past the middle, the longer the maturity date moves out the difference in yields level off. An inverted yield curve shows the opposite and means that there is much more risk in the short term than the long term, so yields are higher on short term bonds.
What we are seeing this week is normal in that short term yields are lower than long term, but the curve is unusually steep. It's at its steepest slope since 2015/16. Investors see short term bonds as much safer than long term bonds, likely on the optimism of the short term economic recovery this year. Longer term, investors are more uncertain. What will happen to the dollar? When will the fed stop its easy money policy? So there is less demand for long term bonds, investors selling, bond prices drop, and yields go up.
If the fed wants to get revenues from selling 10y, 20y, 30y bonds, what do they need to do? They need to entice bond investors by covering the risk with greater reward. They need to either stop injecting money into the economy which is devaluing the dollar (and making long term bonds risky), increase purchases of longer term bonds to control the yield curve, or they need to raise interest rates. Regardless of comments from the fed that they are not concerned with the increasing yields, it has investors spooked, sending them back and forth between fear and greed.
Technology was back on top on Thursday. Long term yields were higher, but seemed under control. Friday Technology was back to the bottom, but after a morning dip, buyers brought the Nasdaq back up to close near an intraday high. Despite the yield curve steepening again with the 30y and 10y yields hitting their highest since early 2020, inflation numbers and consumer sentiment were better than expected. That was enough to give bullish investors optimism and end the week with the DJI and RUT at all time-highs and the SPX knocking on the door.
Despite all the turmoil, the Nasdaq closed the week with a +3.09% gain on slightly lower volume. The closing range of 86% is far better than the previous weeks. The index had a higher low but a lower high, making this an inside week.
I've redrawn the channel from the March bottom. If the index can stay in this channel, then it would seem the economic outlook has been priced into big tech and growth stocks, and the index can start to follow along with the gains we've seen in the Dow Jones Industrial and Russell 2000.
The S&P 500 (SPX) advanced +2.64%. The Dow Jones Industrial average (DJI) gained 4.07%. The Russell 2000 (RUT) gained 7.32% for the week.
The VIX volatility index closed the week with a -16.10% decline.
It was a wild week for the sectors as investors rotated in and out of Technology and Communications stocks. All sectors ended the week with gains.
Consumer Discretionary ( XLY ) was the big winner. Large stimulus checks will be delivered soon that are expected to be poured into the economy via consumer spending on both needs and wants.
Technology ( XLK ) and Communications ( XLC ) spent Monday at the bottom of the sector list, Tuesday at the top, Wednesday at the bottom, Thursday at the top, and Friday at the bottom. In the end, the two sectors landed just behind the SPX in performance, but did have gains for the day.
Financials ( XLF ) was also one to watch. It flipped back and forth as investors followed closely what was happening in the bond markets. The increase in yields could be a boon for Financials. The increased yields would have the opposite impact on big technology and communications companies and smaller growth companies. As yields went back and forth, so did the performance of these sectors.
Energy ( XLE ) ended the week as the worst sector. Although it had a big gain on Wednesday, it wasn't enough to cover the losses on Monday and Tuesday.
Utilities ( XLU ) and Real Estate ( XLRE ) did not have any big days, but were on a steady rise throughout the week. They ended the week in 2nd and 3rd place on the list. The two sectors are often used as defensive plays.
Steep yield curve. You can see the spread between the US 10y and 2y treasury bond yields in the top chart, also marked with a green horizontal line so you can see just how long since the spread has been that wide. Also note that US 30y and 10y yields are back to pre-pandemic levels. Inflation and the possibility of a weakening US dollar means long term bonds are out of vogue.
High Yields Corporate Bonds (HYG) and Investment Grade (LQD) corporate bond prices both declined for the week. The spread between corporate bonds and short term treasury bonds remain about the same.
The US Dollar (DXY) pulled back from the recent gains, declining -0.32% for the week.
Silver (SILVER) and Gold (GOLD) both advanced for the week.
Crude Oil Futures (CRUDEOIL1!) declined just slightly from its highest point since 2018.
Timber (WOOD) advanced and is trading at all-time highs. Copper (COPPER1!) and Aluminum (ALI1!) both declined but are still in upward trending channels.
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The Big Four Mega-caps
The four big mega-caps had mixed results for the week. Microsoft (MSFT) and Amazon (AMZN) closed the week with +1.79% and 2.97% gains. Amazon likely got a boost from the stimulus checks expected to increase consumer spending while people are still nervous to shop at brick-and-mortar stores. Apple (AAPL) lost -0.32% for the week. Alphabet (GOOGL) was down-2.24%. Microsoft and Alphabet are trading above 10w and 40w moving average lines. Apple is trading below the 10w MA line and Amazon is trading below both the 10w and 40w moving average liens.
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The Four Recovery Stocks
I picked four recovery stocks to track against the indexes and other indicators in this report. This week all four had gains. Carnival Cruise Lines (CCL) gained over 9% this week. Delta Airlines (DAL) advanced +7.83%. Marriott International (MAR) gained +2.23%. Exxon Mobil gained +1.71%.
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Investor Sentiment
The put/call ratio (PCCE) ended the week at 0.606, showing investors getting a little more bullish. A contrarian indicator, when the put/call ratio is below 0.7, it signals overly bullish sentiment which typically proceeds a pullback in the market.
The CNN Fear & Greed index moved toward the greed side.
The surprise was seeing the NAAIM exposure index go down to 0.48. That's a fairly low level and indicates nervousness from institutional investors. If exposure to equities by money managers is below 50%, then what is driving prices higher?
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The Week Ahead
Monday's TIC Net Long-Term Transactions data will give an idea of how much investor money is flowing in and our of US markets. More inflows means foreign investors are buying US equities and as a proxy, buying the US dollar to buy those equities. On the other side, US investors may be buying more foreign equities, using those markets currencies.
Retail Sales data will be released Tuesday before market open. Industrial Production data will also be released, both indicating the pace at which economic activity is recovering.
On Wednesday, we'll get news on Building Permits and Housing Starts before the market opens. After the opening bell, Crude Oil Inventories will be released. In the afternoon, FOMC economic projections and interest rate projections will be released.
The weekly initial jobless claims data will be released on Thursday. Manufacturing data will also be released that will provide insight into how manufacturing is recovering to meet demand.
Monday's earning reports will include a couple interesting small-caps: Vuzix (VUZI) and Desktop Metal (DM).
Volkswagen (VWAGY) will report on Tuesday. In addition, FUTU Holdings (FUTU), Coupa Software (COUP), Jabil Circuit (JBL), Eastman Kodak (KODK) will report.
Wednesday will include Pinduoduo (PDD), BMW ADR (BMWYY), Cintas (CTAS), Five Below (FIVE).
On Thursday, Nike (NIKE), Accenture (ACN), FedEx (FDX), Dollar General (DG), Weibo Corp (WB), Utz Brands (UTZ) will report.
Be sure to check your portfolio for upcoming earnings reports.
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The Bullish Side
Did you see the Dow Jones Industrial average index? Six consecutive days of gains to set a new all-time high to close the week! The stimulus, passed through congress and signed by President Biden, is a huge amount of support to the economic recovery. Industrial stocks and small-caps are going to lead the charge and eventually the economics will be priced into big tech and growth stocks and they will join the rally.
Never fight the fed. The Fed is continuing easy monetary policy that is fueling massive liquidity in the market.
Many weekly charts look good. It's always important to take a step back and look beyond the daily turmoil.
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The Bearish Side
Treasury bonds continue to have unusual volatility. Bond investors don't like volatility. Note only does it make it harder to use in hedging strategies, but popular trading strategies using multiple maturities of bonds become more difficult.
The steepening curve Is an indicator of future interest rate increases, that will continue to worry equity investors away from the tech mega-caps and growth stocks. That will have an overweight influence on indexes and impact investor sentiment.
The NAAIM exposure index doesn't represent all institutional investors, but it is an indicator of professional portfolio managers sentiment toward the market. At less than 50% exposure, one must question what is driving prices higher. It could be retail traders and passive indexation that is driving the current rally. That may be a recipe for disaster.
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Key Nasdaq Levels to Watch
Although the broader market is clearly not in correction, the Nasdaq is still lagging behind the other indexes. To build confidence in big tech and growth stocks traded on the Nasdaq, some gains on higher volume is required. If key levels on the downside breakdown, we can expect the big players in the Nasdaq to also pull down the other indexes.
On the positive side:
I do occasionally have some errors or typos and will correct them in my blog or in the comments on TradingView. I do not have an editor and do this in my free time.
If you find this helpful, please let me know in the comments. I am also more than happy to add new perspectives and data points if you have ideas.
The structure is the following:
- A recap of the daily updates that I do here on TradingView.
- The Meaning of Life, a view on the past week
- What's coming in the next week
- The Bullish View, The Bearish View
- Key index levels to watch out for
- Wrap-up
If you have been following my daily updates, you can skip down to the “The Meaning of Life”. If not, then this first part is a great play-by-play recap for the week. Click the original charts for more detail each day.
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Monday, March 8, 2021
Facts: -2.41%, Volume lower, Closing range: 2%, Body: 73%
Good: Held above 12,600 as market closed
Bad: Could not hold short rally in morning, selling the rest of afternoon
Highs/Lows: Higher high, higher low
Candle: Short upper wick over a thick red body, no lower wick
Advance/Decline: More than one declining stock for every advancing stock
Indexes: SPX (-0.54%), DJI (+0.97%), RUT (+0.49%), VIX (+3.28%)
Sectors: Utilities (XLU +1.41%) and Materials (XLB +1.34%) were the top sectors. Communications (XLC -1.34%) and Technology (XLK -2.42%) were bottom.
Expectation: Lower
The rotation continues. It's not often that a rotation is so clearly seen, with the Dow Jones ending the day up nearly 1% and the Nasdaq ending the day down 2.41%. Nine sectors outperformed the broader S&P 500 index, while the other two sectors lost enough to bring down the index for a loss by the end of the day.
The Nasdaq closed the day with a -2.41% loss on lower volume. The closing range of 2% followed an afternoon of selling that formed the 73% red body underneath a small upper wick from the short morning rally. There were more declining stocks than advancing stocks.
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Tuesday, March 9, 2021
Facts: +3.69%, Volume higher, Closing range: 71%, Body: 56%
Good: Good gain on higher volume, higher high, higher low, above 13k
Bad: Selling in last hour of day
Highs/Lows: Higher high, higher low
Candle: Slightly longer upper wick with a thick green body
Advance/Decline: Two advancing stocks for every declining stock
Indexes: SPX (+1.42%), DJI (+0.10%), RUT (+1.91%), VIX (-5.65%)
Sectors: Consumer Discretionary (XLY +3.78%) and Technology (XLK +3.40%) were the top sectors. Financials (XLF -0.91%) and Energy (XLE -1.75%) were bottom.
Expectation: Sideways or Higher
The rotation reverses. Today saw a reversal of the past several days rotation as money flooded back into big tech, consumer discretionary, and growth stocks. Treasury bond yields seemed to stabilize a bit allowing investors to turn their eyes on the stimulus and the impact it will have on performance in the near term.
The Nasdaq closed with +3.69% gain on higher volume. The closing range of 72% came after some selling in the final hour of trading, forming the upper wick. The green body covers 56% of the candle and represents a day that was dominated by the bulls. There were two advancing stocks for every declining stock.
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Wednesday, March 10, 2021
Facts: -0.04%, Volume lower, Closing range: 14%, Body: 69%
Good: Higher high, higher low, support above 13,000
Bad: Rejection off 21d EMA in morning led to selling and close near low
Highs/Lows: Higher high, higher low
Candle: Thick red body with small upper and lower wicks, low closing range
Advance/Decline: More advancing stocks than declining stocks
Indexes: SPX (+0.60%), DJI (+1.46%), RUT (+1.81%), VIX (-6.12%)
Sectors: Energy (XLE +2.53%) and Financials (XLF +2.04%) were back on top. Technology (XLK -0.40%) was bottom.
Expectation: Sideways or Lower
The rotation settles. There was still signs of rotation in the market today, with the sector list flipping once again. But the effect is much more subdued than the past week. The passing of the stimulus has investors eyes wide open while they sent the Dow Jones Industrial to all-time highs.
The Nasdaq was not able to benefit from the enthusiasm as it declined -0.04%. A sideways move, but still a day marked by selling after a morning gap-up. The closing range of 14% is underneath a thick red body of 69% and slightly longer upper wick formed just after the market opened. There were more advancing stocks than declining stocks, however volume on declining stocks was higher.
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Thursday, March 11, 2021
Facts: +2.52%, Volume lower, Closing range: 81%, Body: 67%
Good: Another higher high and higher low, back above 21d EMA and 50d MA
Bad: Not much, resistance at 13,400
Highs/Lows: Higher high, higher low
Candle: Thick red body with small upper and lower wicks, low closing range
Advance/Decline: Almost three advancing stocks for every declining stock
Indexes: SPX (+1.04%), DJI (+0.58%), RUT (+2.31%), VIX (-2.88%)
Sectors: Technology (XLK +2.14%) and Communications (XLC +1.89%) were top. Utilities (XLU -0.26%) and Financials (XLF -0.29%) were bottom.
Expectation: Sideways or Higher
The back and forth continues as the Nasdaq and technology stocks rise again. The sector list has flipped back and forth the last several days as investors rotate in and out of big tech and growth stocks. Today, the market rallied as jobs reports showed positive gains in the labor market and the stimulus is proceeding to Biden's signature. Technology was back on top while Financials moved to the bottom.
The Nasdaq closed with a +2.52% gain on lower volume. The 67% green body was formed in the morning as the index quickly rose to intraday highs around 13,400 and stayed there the rest of the day. The short upper wick is above an 81% closing range. There were almost three advancing stocks for every declining stock.
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Friday, March 12, 2021
Facts: -0.59%, Volume lower, Closing range: 97%, Body: 58%
Good: Bulls bought back the morning lows to bring index back above 21d EMA
Bad: Lower high and lower low
Highs/Lows: Lower high, lower low
Candle: Green body above a lower wick with very small upper wick
Advance/Decline: About even advancing and declining stocks
Indexes: SPX (+0.10%), DJI (+0.90%), RUT (+0.61%), VIX (-5.57%)
Sectors: Real Estate (XLRE +1.72%) and Utilities (XLU +1.35%) were top. Communications (XLC -0.28%) and Technology (XLK -0.72%) were bottom.
Expectation: Sideways or Higher
Are you dizzy yet? This rotation just won't end. Every day this week the Technology sector flipped from the bottom of the sector list to the top and then the next day to the bottom. Yesterday it was at the top. Today it's back at the bottom. As long term bond yields are reaching for pre-pandemic highs, investors are still trying to determine the impact on valuations of big tech and growth stocks.
The Nasdaq closed the week with a green candle, but ended the day with a -0.59% decline. Volume was lower but the bulls bought up a morning dip to bring the index back above the 21d EMA in the afternoon. A closing range of 97% means a very small upper wick. The longer lower wick rests underneath a 58% green body. There were about the same number of advancing and declining stocks.
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The Meaning of Life (View on the Week)
It was a wild week of rotation instigated by volatility in the treasury bond markets. Economists and investors weighed the impact of stimulus on inflation, currencies, bonds and equities. The outcomes could have opposite effects on different sectors. Technology and Communications, that have growth mega-caps, could be negatively impacted by higher yields, raising the costs of borrowing money to drive growth. Financials could benefit from the higher yields driving interest rates and additional revenue on both mortgages and commercial borrowing.
The winners from the stimulus bill will be industrials and materials as the economy returns to pre-pandemic levels and these sectors benefit. The market made that clear as the Dow Jones Industrial gained 1% on Monday while the Nasdaq declined -2.41%. Utilities, Industrials and Materials were top sectors along with Financials. All cyclicals, but as the first three would remain steady throughout the week, Financials was up and down depending on bond performance.
But it also seemed no one was quite ready to give up on big tech and growth stocks. Tuesday was "buy the dip" day, sending the Technology sector back to the top of the list. Growth companies like Tesla (TSLA) gained 20%, rebounding off recent lows. The four big mega-caps all closed the day with gains. Financials and Energy moved to the bottom of the sector list. The 3y note auction brought some optimism back to the bond market, bringing yields back down from recent gains.
The 10y auction on Wednesday also brought some confidence back to the bonds market. Yields on treasury bonds pulled back a little. But even as yields came down, the yield curve steepened. A steep yield curve forecasts higher interest rates and could mean other monetary policy changes from the Fed. That's where the fear is focused. Technology moved back to the bottom of the sector list on Wednesday.
A quick refresh on the yield curve. The yield of a treasury bond can be viewed as the level of risk investors see in the bond. Shorter term bonds are paid back quickly and therefore investors usually assign lower risk and therefore require lower yields. Longer term bonds are viewed with higher risk, there's more time between now and the maturity date of the bond for something happening that will impact the value, so yields are higher. Risk/reward.
The yield curve is a plotting of the interest rates from short term to long term.
When the yield curve is normal, there should be an upward sloping curve. From the shortest term bonds to the middle term, yields will accelerate. As you move past the middle, the longer the maturity date moves out the difference in yields level off. An inverted yield curve shows the opposite and means that there is much more risk in the short term than the long term, so yields are higher on short term bonds.
What we are seeing this week is normal in that short term yields are lower than long term, but the curve is unusually steep. It's at its steepest slope since 2015/16. Investors see short term bonds as much safer than long term bonds, likely on the optimism of the short term economic recovery this year. Longer term, investors are more uncertain. What will happen to the dollar? When will the fed stop its easy money policy? So there is less demand for long term bonds, investors selling, bond prices drop, and yields go up.
If the fed wants to get revenues from selling 10y, 20y, 30y bonds, what do they need to do? They need to entice bond investors by covering the risk with greater reward. They need to either stop injecting money into the economy which is devaluing the dollar (and making long term bonds risky), increase purchases of longer term bonds to control the yield curve, or they need to raise interest rates. Regardless of comments from the fed that they are not concerned with the increasing yields, it has investors spooked, sending them back and forth between fear and greed.
Technology was back on top on Thursday. Long term yields were higher, but seemed under control. Friday Technology was back to the bottom, but after a morning dip, buyers brought the Nasdaq back up to close near an intraday high. Despite the yield curve steepening again with the 30y and 10y yields hitting their highest since early 2020, inflation numbers and consumer sentiment were better than expected. That was enough to give bullish investors optimism and end the week with the DJI and RUT at all time-highs and the SPX knocking on the door.
Despite all the turmoil, the Nasdaq closed the week with a +3.09% gain on slightly lower volume. The closing range of 86% is far better than the previous weeks. The index had a higher low but a lower high, making this an inside week.
I've redrawn the channel from the March bottom. If the index can stay in this channel, then it would seem the economic outlook has been priced into big tech and growth stocks, and the index can start to follow along with the gains we've seen in the Dow Jones Industrial and Russell 2000.
The S&P 500 (SPX) advanced +2.64%. The Dow Jones Industrial average (DJI) gained 4.07%. The Russell 2000 (RUT) gained 7.32% for the week.
The VIX volatility index closed the week with a -16.10% decline.
It was a wild week for the sectors as investors rotated in and out of Technology and Communications stocks. All sectors ended the week with gains.
Consumer Discretionary ( XLY ) was the big winner. Large stimulus checks will be delivered soon that are expected to be poured into the economy via consumer spending on both needs and wants.
Technology ( XLK ) and Communications ( XLC ) spent Monday at the bottom of the sector list, Tuesday at the top, Wednesday at the bottom, Thursday at the top, and Friday at the bottom. In the end, the two sectors landed just behind the SPX in performance, but did have gains for the day.
Financials ( XLF ) was also one to watch. It flipped back and forth as investors followed closely what was happening in the bond markets. The increase in yields could be a boon for Financials. The increased yields would have the opposite impact on big technology and communications companies and smaller growth companies. As yields went back and forth, so did the performance of these sectors.
Energy ( XLE ) ended the week as the worst sector. Although it had a big gain on Wednesday, it wasn't enough to cover the losses on Monday and Tuesday.
Utilities ( XLU ) and Real Estate ( XLRE ) did not have any big days, but were on a steady rise throughout the week. They ended the week in 2nd and 3rd place on the list. The two sectors are often used as defensive plays.
Steep yield curve. You can see the spread between the US 10y and 2y treasury bond yields in the top chart, also marked with a green horizontal line so you can see just how long since the spread has been that wide. Also note that US 30y and 10y yields are back to pre-pandemic levels. Inflation and the possibility of a weakening US dollar means long term bonds are out of vogue.
High Yields Corporate Bonds (HYG) and Investment Grade (LQD) corporate bond prices both declined for the week. The spread between corporate bonds and short term treasury bonds remain about the same.
The US Dollar (DXY) pulled back from the recent gains, declining -0.32% for the week.
Silver (SILVER) and Gold (GOLD) both advanced for the week.
Crude Oil Futures (CRUDEOIL1!) declined just slightly from its highest point since 2018.
Timber (WOOD) advanced and is trading at all-time highs. Copper (COPPER1!) and Aluminum (ALI1!) both declined but are still in upward trending channels.
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The Big Four Mega-caps
The four big mega-caps had mixed results for the week. Microsoft (MSFT) and Amazon (AMZN) closed the week with +1.79% and 2.97% gains. Amazon likely got a boost from the stimulus checks expected to increase consumer spending while people are still nervous to shop at brick-and-mortar stores. Apple (AAPL) lost -0.32% for the week. Alphabet (GOOGL) was down-2.24%. Microsoft and Alphabet are trading above 10w and 40w moving average lines. Apple is trading below the 10w MA line and Amazon is trading below both the 10w and 40w moving average liens.
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The Four Recovery Stocks
I picked four recovery stocks to track against the indexes and other indicators in this report. This week all four had gains. Carnival Cruise Lines (CCL) gained over 9% this week. Delta Airlines (DAL) advanced +7.83%. Marriott International (MAR) gained +2.23%. Exxon Mobil gained +1.71%.
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Investor Sentiment
The put/call ratio (PCCE) ended the week at 0.606, showing investors getting a little more bullish. A contrarian indicator, when the put/call ratio is below 0.7, it signals overly bullish sentiment which typically proceeds a pullback in the market.
The CNN Fear & Greed index moved toward the greed side.
The surprise was seeing the NAAIM exposure index go down to 0.48. That's a fairly low level and indicates nervousness from institutional investors. If exposure to equities by money managers is below 50%, then what is driving prices higher?
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The Week Ahead
Monday's TIC Net Long-Term Transactions data will give an idea of how much investor money is flowing in and our of US markets. More inflows means foreign investors are buying US equities and as a proxy, buying the US dollar to buy those equities. On the other side, US investors may be buying more foreign equities, using those markets currencies.
Retail Sales data will be released Tuesday before market open. Industrial Production data will also be released, both indicating the pace at which economic activity is recovering.
On Wednesday, we'll get news on Building Permits and Housing Starts before the market opens. After the opening bell, Crude Oil Inventories will be released. In the afternoon, FOMC economic projections and interest rate projections will be released.
The weekly initial jobless claims data will be released on Thursday. Manufacturing data will also be released that will provide insight into how manufacturing is recovering to meet demand.
Monday's earning reports will include a couple interesting small-caps: Vuzix (VUZI) and Desktop Metal (DM).
Volkswagen (VWAGY) will report on Tuesday. In addition, FUTU Holdings (FUTU), Coupa Software (COUP), Jabil Circuit (JBL), Eastman Kodak (KODK) will report.
Wednesday will include Pinduoduo (PDD), BMW ADR (BMWYY), Cintas (CTAS), Five Below (FIVE).
On Thursday, Nike (NIKE), Accenture (ACN), FedEx (FDX), Dollar General (DG), Weibo Corp (WB), Utz Brands (UTZ) will report.
Be sure to check your portfolio for upcoming earnings reports.
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The Bullish Side
Did you see the Dow Jones Industrial average index? Six consecutive days of gains to set a new all-time high to close the week! The stimulus, passed through congress and signed by President Biden, is a huge amount of support to the economic recovery. Industrial stocks and small-caps are going to lead the charge and eventually the economics will be priced into big tech and growth stocks and they will join the rally.
Never fight the fed. The Fed is continuing easy monetary policy that is fueling massive liquidity in the market.
Many weekly charts look good. It's always important to take a step back and look beyond the daily turmoil.
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The Bearish Side
Treasury bonds continue to have unusual volatility. Bond investors don't like volatility. Note only does it make it harder to use in hedging strategies, but popular trading strategies using multiple maturities of bonds become more difficult.
The steepening curve Is an indicator of future interest rate increases, that will continue to worry equity investors away from the tech mega-caps and growth stocks. That will have an overweight influence on indexes and impact investor sentiment.
The NAAIM exposure index doesn't represent all institutional investors, but it is an indicator of professional portfolio managers sentiment toward the market. At less than 50% exposure, one must question what is driving prices higher. It could be retail traders and passive indexation that is driving the current rally. That may be a recipe for disaster.
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Key Nasdaq Levels to Watch
Although the broader market is clearly not in correction, the Nasdaq is still lagging behind the other indexes. To build confidence in big tech and growth stocks traded on the Nasdaq, some gains on higher volume is required. If key levels on the downside breakdown, we can expect the big players in the Nasdaq to also pull down the other indexes.
On the positive side:
- The Nasdaq closed above the 21d EMA on Friday, but below the 50d MA. That's the first key level to pass for next week. That level is at 13,367.48.
- Last week's high is at 13,601.33. This week could not make a new high, so having the index make that milestone next week will be important.
- 14,000 will be the next area of resistance.
- The all-time high is at 14,175.12. That might be a stretch to get there this week, but keep it in our sites.
On the downside, there are several key levels to raise caution flags:- Stay above the 21d EMA which is a currently at 13,290.28.
- The 10d MA is at 13,105.93. Going below this line will be a red flag.
- If the index has a pull back, the 13,000 is a support area that must hold.
- 12,599.23 is the low from this week. Stay above that level to make a higher low.
- The next support area is 12,500-12,550.
- 12,397.05 is the current bottom of the correction on the Nasdaq.
This was a week that reminded us to take a step back and look at the weekly charts. The Nasdaq chopped back and forth, that seems like losses. But on the weekly chart, the index had a good gain with a great closing range.
At the same time, the choppiness may continue into the coming week and cause investors to get overly nervous. Although the other major indexes are performing well, eventually the big players in the Nasdaq could pull down those indexes as well.
It's important to avoid predictions. Instead, set some expectations for what you might think will happen. Watch those key levels in the Nasdaq, and follow the price action of the index and your favorite stocks. Keep stop losses up to date to protect from a sudden turn to the downside. But lets hope for upside.
The report is a bit brief this week since I'm heading out to vacation. I hope you have a great week ahead! I'll be trading from the beach. :)
Good luck, stay healthy and trade safe! - Stay above the 21d EMA which is a currently at 13,290.28.
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