Daily Market Update for 1/4

Original Chart

Notes

Ideas always welcome in the comments. Errors will be amended as comments on TradingView or corrected inline in my blog.

Tuesday, January 4, 2022

Facts: -1.33%, Volume higher, Closing Range: 32%, Body: 68% Red
Good: Closed above the 21d EMA and 50d MA
Bad: Dip below the key moving averages, decline on higher volume .
Highs/Lows: Higher high, Lower low
Candle: Large red body with no upper wick
Advance/Decline: 0.51, two declining stocks for every advancing stock
Indexes:SPX (-0.06%), DJI (+0.59%), RUT (-0.16%), VIX (+1.87%)
Sector List: Energy ( XLE +3.46%) and Financials ( XLF +2.63%) at the top. Technology ( XLK -1.06%) and Health ( XLV -1.32%) at the bottom.
Expectation: Sideways or Lower

Market Overview

While most of the market dipped, cyclical stocks took the lead. Energy and Financials led the day while Industrial and Materials had gains after missing out on yesterday’s momentum. The rotation shouldn’t be a huge surprise after the lopsided gains the previous day and the selling signals of richly (dare we say over) valued growth stocks.

The Nasdaq lost -1.33%. Volume was higher than the previous day and returned to the 50d average. The candle is covered by 68% red body with no upper wick, as the index sold off immediately after the market opened. After dipping below the 21d EMA and 50d MA, the Nasdaq recovered to close above the two lines, creating the lower wick of the candle. There were two declining stocks for every advancing stock.

The Dow Jones Industrial Average (DJI) had a record close, helped by large cyclicals to gain +0.59%. The S&P 500 (SPX) closed down -0.06%. The Russell 2000 (RUT) declined -0.16%. Both indexes held some gains from yesterday. The VIXVolatility Index ( VIX ) increased by +1.87%.

Five of the S&P 500 sectors gained for the day, led by the four cyclical sectors. Energy ( XLE +3.46%) and Financials ( XLF +2.63%) were at the top. Technology ( XLK -1.06%) and Health ( XLV -1.32%) were the worst-performing sectors.

The ISM Manufacturing Purchasing Managers Index (PMI) for December was 58.7, lower than the expected 60.0. JOLTs Job Openings for November was also lower than expected, showing 10.6 million, compared to the forecast of 11.1 million. API Weekly Crude Oil Stock showed much higher demand than expected.

The US Dollar Index DXY ) increased by +0.06%. The US 30y and 10y Treasury Yields rose for the day while the 2y Treasury Yield declined. High Yield ( HYG ) Corporate Bond prices fell for another day. Investment Grade ( LQD ) Corporate Bond prices advanced slightly. Gold and Silver rose today after sharp declines yesterday.

The put/call ratio ( PCCE ) increased to 0.611. The CNN Fear & Greed index is in Greed but continuing to inch toward Extreme Greed.

All four largest mega-caps declined for the day. Only Apple AAPL ) remains above its 21d EMA and 50d MA after setting records the previous day.

Toyota Motor Corporation ( TM ) topped the mega-cap list with a +6.92% gain. Those gains come alongside huge days for Ford (F) and General Motors ( GM ), which gained +11.67% and +7.47%. Each of the three had separate positive news stories. Toyota topped GM in sales for 2021. Ford announced an increase in production for the all-electric F-150 pickup. GM rallied the day before the all-electric Chevrolet Silverado is to debut.

Another auto manufacturer was at the bottom of the mega-cap list. Telsa ( TSLA ) had a -4.18% decline after gaining more than +13% the previous day.

Only two stocks in the Daily Market Update Growth List gained for the day. Ehang Holdings (EH) gained +3.77%, and D.R. Horton ( DHI ) gained +0.44%. There were many losses greater than 5% on the list. Sea Limited (SE) had the most significant loss, declining -11.41%. It was just not a good day for growth stocks.

Looking ahead

ADP Nonfarm Employment Change data for December will be available in the morning. After the market opens, we’ll get the Markit Composite and Services Purchasing Managers Index data. Crude Oil Inventories will be available later in the morning.

The Fed will release the December Meeting Minutes in the afternoon.

Trends, Support, and Resistance

The Nasdaq dipped below the 21d EMA , 50d MA, and the 15,600 support area before closing slightly above all three. That may provide some support for further gains tomorrow.

If the index returns to the trend line from the 12/20 low, that would mean a +2.19% gain for Wednesday.

The five-day trend line points to a -0.02% decline.

Continuing the one-day trend would result in a -1.32% decline.

Wrap-up

I didn’t quite forecast a rotation yesterday, but it was in the back of my mind. Two things stood out. First, on a day with broad gains across the indexes and high advance/decline ratios, why were two cyclical sectors ( Industrials and Materials) left out of the gains. I wouldn’t expect them to lead for the day, but greater than 1% declines?

The second signal was that several “darling” stocks with significant growth over the past year sold off yesterday. DataDog and MongoDb were two big decliners. It was a signal that investors were moving away from richly valued growth stocks and toward opportunities in undervalued small-caps and, as we saw today, value plays in cyclicals.

There are likely more rotations to come as investors position for this year. Based on the chart, the expectation for the Nasdaq is Sideways or Lower tomorrow.

Stay healthy and trade safe!

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