Daily Market Update for 1/21

Original Chart

Notes

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

Friday, January 21, 2022

Facts: -2.72%, Volume higher, Closing Range: 1%, Body: 68% Red
Good: Nothing
Bad: Fourth failed rally attempt this week, low closing range
Highs/Lows: Lower high, Lower low
Candle: Long upper wick with large red body. No lower wick.
Advance/Decline: 0.24, four declining stocks for every advancing stock
Indexes:SPX (-1.89%), DJI (-1.30%), RUT (-1.78%), VIX (+12.74%)
Sector List: Consumer Staples ( XLP +0.08%) and Real Estate ( XLRE -0.06%) at the top. Consumer Discretionary ( XLY -2.93%) and Communications ( XLC -3.38%) at the bottom.
Expectation: Sideways or Lower

Market Overview

That’s four days in a row with a long upper wick from a failed morning rally and a dismal closing range under 10%. Panic sets in for investors as the Fed’s rate hike decision approaches to fight higher inflation while risking the possibility of a recession.

The Nasdaq declined -2.72% to end its worst week since the pandemic began and its fourth weekly decline in a row. Volume was higher than the previous day. The candle looks just like the other four this week, with a long upper wick from a failed rally turning to a large red body and no lower wick. The closing range was just 1% under a 68% red body. There were four declining stocks for every advancing stock.

The S&P 500 (SPX) declined -1.89% to close below its 200d moving average. The Dow Jones Industrial Average (DJI) declined -1.30%. The Russell 2000 (RUT) gave up -1.78%. The VIXVolatility Index continued to soar with a +12.74% rise on Friday.

Only Consumer Staples ( XLP +0.08%) advanced for the day. The other defensive sectors of Real Estate ( XLRE -0.06%) and Utilities ( XLU -0.19%) were the next two in the sector list. Consumer Discretionary ( XLY -2.93%) and Communications ( XLC -3.38%) were at the bottom.

Retail Sales in the UK and Canada for December echoed the US result, missing targets and declining month-over-month.

The US Dollar index DXY ) was fairly steady for the week, declining -0.14% on Friday. US 30y, 10y and 2y Treasury Bonds all declined as investors moved to the safety of bonds vs the volatility in equities. High Yield ( HYG ) and Investment Grade ( LQD ) Corporate Bond prices tracked Treasuries higher (Yields lower, Prices higher).

Silver and Gold both moved lower for the day. Crude Oil Futures , Timber, Copper and Aluminum Futures all sank.

The put/call ratio ( PCCE ) rose to 1.15, the most bearish reading since March 2020. The CNN Fear & Greed index floated back into the fear range. The NAAIM money manager exposure index declined to 56.73 from 74.78 the previous week.

All four largest mega-caps declined. Amazon ( AMZN ) continues to fall more than the others, declining -5.95% on Friday. Alphabet GOOGL ) dropped -2.22%. Apple AAPL ) and Microsoft MSFT ) faired a bit better, declining -1.28% and -1.85%.

Only four mega-caps gained for the day. Abbot Laboratories ( ABT ) was the top gainer, gaining 0.90%. The biggest loser in the list was Walt Disney (DIS) which lost -6.94%, possibly weighted down by Netflix’s disappointing subscriber growth. Alibaba (BABA) was also at the bottom of the list after topping it several days this week. It gave back the intraweek gains, declining -5.95% on Friday.

In the Daily Update Growth List, only two stocks advanced . Peloton (PTON) gained +11.73%, bouncing back from a -24% decline the previous day. Beyond Meat BYND ) squeezed out a +0.29% advance. At the bottom of the list was Netflix , ending the day with a -21.79% decline. The company reported slower than expected subscriber growth.

Looking ahead

The big news next week will be the Fed’s rate increase decision on Wednesday. Also impacting the market will be earnings reports from Apple Microsoft and Tesla , the largest of the big hitters reporting next week.

Monday will bring the Manufacturing and Services Purchasing Manager Index data for January, a forward-looking indicator on economic performance.

Earnings reports on Monday include IBM IBM ) and Haliburton (HAL).

Trends, Support, and Resistance

The index is now -15% below its all-time high.

The five-day trend line and the trend line from the 1/12 high both point to a +0.49% advance for the index if it returns to the longer trends.

The one-day trend line leads to a -1.39% decline for Monday.

Wrap-up

A painful week ends with investors at their most bearish level since the March 2020 crash. Some people call for further pain as a bubble of speculative investments over the past two years bursts. Others are saying this looks like the correction we needed and this could be the bottom.

What do the charts and indicators tell us? The Nasdaq chart is dismal. It has no indication of stopping the decline. Every rally attempt this week failed and three of the four days showed distribution from institutional investors, marked by high volume declines.

The percentage of stocks above their 200d and 50d moving averages are both at their lowest since the pandemic began. However, they have seen lower levels during the start of the pandemic and in late 2018 and early 2016. So these indicators could go lower.

Treasury Bond yields rose sharply the previous week on speculation that the Fed would initiate interest rate hikes with a 50 basis points instead of the previously expected 25 basis points. That uncertainty and volatility in bonds just further tanked equities. One could look at the Fed’s decision on Wednesday as a point of stabilization, especially if the Fed confirms the 25 basis point expectation.

Investor sentiment often hits extremes around reversals. The put/call ratio rose to its highest (most bearish ) point since March 2020, and the first time since 2020 that there were more puts than calls in the market. The CNN Fear & Greed index is not in Extreme Fear, however four out of seven of its subcomponents are there. The NAAIM money manager exposure index is below 60, where it typically bottoms and moves higher as money managers buy the dip.

History tells us that equities typically decline leading up to rate hikes and then rise after rate hikes. However, we are in unprecedented times after historic low interest rates and massive QE causing the highest level of inflation since the 1980s. That potentially requires a very hawkish fed to bring it under control. So is there more uncertainty ahead?

The bottom line is we’re still not out of the woods. Rather than trying to guess, or listen to click-bait media, wait for the market to confirm the bottom. A few days of higher volume advances with broad support across the market will tell us that institutions are back in the game.

Stay healthy and trade safe!

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