Portfolio managers threw a wrench into the works last week to send the Nasdaq to 5-week lows.
The bearish market volatility last week was another confirmation why you should never take historical trends for granted. Fund managers were supposed to add prior winners to their portfolios for window dressing. Instead, they turned the tables this year and sold the winners to capture profits before the end of the quarter. The historical trend is your friend until it ends.
Now we are looking at some bearish charts and multiple analysts suggesting the summer correction will come early this year. Historically, August and September are the worst months of the year for the markets. Is that another trend that is going to reverse?
The Nasdaq closed at a 5-week low on Friday and the Nasdaq futures are up 16 points on Sunday evening with the S&P futures up 5 points. If those numbers hold overnight it would suggest a positive open. In theory, there should be new retirement money hitting the market over the next three days. Monday's volume should be very low with the market open only half a day so there is the potential for some significant volatility if there is a sudden surge in buying. This would be a good spot to buy the dip.
The Dow took a deep dive on Thursday to touch 21,197 before rebounding. The recovery was not enough to lift it back over prior support at 21,400. That level has been run over so many times over the last two weeks, it is no longer relevant.
The Dow now has resistance just under 21,500 and support around 21,125. That gives it a broad range to travel without any material damage to the market but trading under Thursday's close at 21,287 would give traders heartburn.
Earnings begin the following week and Dow components are early reporters. That could help or hurt market direction depending on the outcome. Earnings are expected to be good.
The S&P has been fluctuating in a wide range between 2,420 and 2,450. There is intermediate resistance at 2,440 but we have traded above that level multiple times. The S&P broke support intraday at 2,420 on Thursday to hit 2,405. That 15-point support break cleared some stop losses and buy stops so it should be weaker if the dip is repeated.
The S&P chart is not yet bearish, but the next decline under 2,420 would definitely change the outlook to bearish.
The Russell outperformed the big cap indexes because 17% of its weighting is financials and that sector was up sharply on Thursday. The index came close to a new high. Unlike the positive big cap futures on Sunday, the Russell futures are slightly negative. The critical level to watch is 1,400.
The economic calendar is busy despite being a holiday week. This is payroll week and the FOMC minutes could cause issues. The ISM Manufacturing on Monday is an important report but nobody will be paying attention because of the holiday. The following week Yellen testifies to Congress and that is always a minefield.
Market direction next week could be uncertain. The volume on Monday "should" be minimal but Wednesday could see a resumption in activity because it is the first week in the quarter. If you are in no rush to trade, it may not hurt to see what happens on Wed/Thr and then make a decision on market direction. Don't forget the holiday event risk on Tuesday. There will always be another day to trade.
Enter passively, exit aggressively!
Send Jim an email