As we embark on the April monthly options expiration it is time to do a market analysis. This coincides with the start of earnings season, companies will start reporting results from the first quarter. By most accounts, analysts have lowered the expectations bar significantly, in many case these firms will only have to ‘walk over the bar’ to meet analyst numbers. That is often the case, and most certainly the stock market reflects this sort of discounting. Hence, this could be the catalyst to boost the market in the next time frame, but there is quite a bit of work to see this materialize.
Yet, after such a powerful and unexpected run since early February shouldn’t we expect some give back? Of course we should, but who wants to get chopped up in that scenario? If we take an objective view of the technicals, keep an open mind as my friend Chris Ciovacco reminds us daily (and weekly) then we can take what the market is willing to give us whether it is up or down. Many have been waiting for a dip to buy into this market — well, here is one of them and it may be at a nice spot.
The SPX had a couple of distribution days this past week, more than we’ve seen in a five day period since the end of February. The rally, which started out from the low on February seems to have traveled its normal course of about six weeks before stalling. We can see over the past week there seems to be fatigue in the price action. One worry is if price action does not improve then we’ll see everyone hitting the exits at the same time – remember how the year started out in January?
Certainly conditions are different now than in the beginning of the year – gold is up strong, crude is now in an uptrend and other commodities are following suit. The dollar is weak and closed the week out at levels not seen since August 2015. We may see this continue as the currency wars take center stage along with central bankers.
Back to the charts. The SPX 500 is the best positioned to digest gains and resume an upward bias. The index is now sitting on its 20 MA, often an area of first defense following a breakout. This is not a ‘line in the sand’ per se for the bulls, but if it fails to be re-captured over the next several days when this constitutes more selling to come. We’re not calling a top here, that’s not our game. We talked on last week’s webinar about taking a patient, ‘wait and see’ approach.
The indicators are somewhat mixed but are flashing some yellow alerts. Breadth has broken down over the past couple weeks, but it’s too early to determine the significance. The rally in March had tremendous breadth, so good it made an all-time high (last reached in 2014), so maybe this is just a short pause to ‘catch a breather’. The VIX is still relatively low, and while it is stocks can continue to rise (but we can expect the short-lived smack downs to come unannounced).
Volume was elevated on the two big sell days this week (Tues and Thurs), and the Nasdaq now has six distribution days in its count (thanks IBD). Finally, the sentiment polls are mixed but begrudgingly show some trying to get kicked into the bullish camp (kicking and screaming).
