In over 45 years of following the stock market, I have never heard the term chaos used as a positive for buying stocks. By the Thursday close the S&P 500 was down over 10% which was enough to qualify the decline as a correction. In many discussions or comments on the stock market or economy last week, chaos was often mentioned.
In discussing the stock market’s decline since the February 19th high the term “historic” is now frequently used. A Bloomberg comment on Friday noted that “US stocks just posted their worst start for new administration since the global financial crisis. The dollar is headed for its biggest post-inauguration loss since Richard Nixon began his second term in 1973.”
From the bear market low in March 2009 until February 2020 five declines qualified as corrections. They range from 19% in 2011 which corresponded with the US debt crisis in August and an A/D line bottom in October.
In May 2015, the NYSE All A/D line formed a negative divergence that resulted in a 12% decline that ended in August 2015. That was followed by a 13% decline from 11/3/2015 to 2/11/2016.
A week before the January 2016 low at 1812.29 (line a) the bullish % from the American Association of Individual Investors (AAII) survey dropped to 17.9% which was below the 18.92% reading at the bear market low on March 5, 2009. During the week of January 15, 2016, the S&P 500 also dropped below the weekly starc- band as it did the following week. These oversold readings increased the odds of a rally.
After a two-week rally of 7.4%, the sellers again took over as the S&P reached a low at 1810.10 and the bullish % dropped to 19.24%. The AAII Bull%-Bear% dropped to -29.5% very close to -30 which is viewed as an extremely low reading for bullish sentiment. In reference, it reached 51.4% on March 5, 2009, which was the lowest reading since the recession of 1990 when it reached -54%.
The combination of the extremely low bullish sentiment, oversold starc- band analysis, and the bullish signals from the A/D analysis indicated that an important low was forming in February 2016. This evidence was discussed in Forbes’s “The Week Ahead: Is There Blood In The Streets Yet?”. It was the start of a rally that lasted until January 2018.
So what about the current technical outlook? The four-week decline has dropped the Spyder Trust (SPY), below its starc- band for the past two weeks. The starc- band was last exceeded in August and April of 2024. SPY also dropped below the yearly pivot at $553.86 with a low of $549.68 but closed above it and also held above the support at line b.
The failure of the S&P 500 Advance/Decline line to make a new high in February created a bearish divergence, line c. The weekly A/D line is still above its MAs and to confirm the divergence and signal a deeper decline the January low and support at line d would need to be broken. The S&P 500 A/D line is the only weekly A/D that is still positive as the NDX 100 A/D turned negative last week by closing below its WMA but it did confirm the recent highs.
The bullish% from AAII on Thursday made a new three-week low at 19.1% and the AAII Bull%-Bear% is at -40.10. This means that the bullish sentiment is lower now than it was at the early 2016 low. This differential bounced to +14 on January 25th to close above its EMA before it started to drop sharply.
The Nasdaq Composite was up 100% from the October 2022 lows until the December 2024 high of 20,204. It closed Friday at 17,754 down 12.1% from the December high. The weekly close at 17,750 was just below the YrPivot at 17,797 (in purple) for the first time since April 2023. This could change in the week ahead. The major 38.2% support is still 8% lower at 16,326.
The Nasdaq Composite has traded below its weekly starc- band (yellow dots) for the last three weeks in a row. These bands were developed by my old friend, the late Manning Stoller. These bands were designed to contain 90% of the price range so if prices were near the starc+ bands it is a high-risk buy or a low-risk sell as the probabilities would favor a reversion to the mean. Multiple declines below the weekly starc_ bands were ideally used to cover short positions.
Looking back over the past 10 years the last time this happened for the Nasdaq Composite was during the 5% decline in May of 2019. Before the January 2016 lows, the starc- bands gave a similar warning as did the AAII sentiment data.
Despite the over 2% gains in many of the averages on Friday, it was still a rough week. The Dow Jones Transportation Average was the weakest down 6.2% as it is down 7.9% year-to-date just a bit better than the iShares Russell 2000 on a YTD basis.
The Dow Jones Industrials lost 3.1% which was worse than the 2.5% decline in the Nasdaq 100 or the 2.3% decline in the S&P 500. The Nasdaq 100 is still up 0.7% YTD but is well behind the SPDR Gold Shares 13.7% YTD gain. According to Bloomberg, this was golds “best start to a presidential cycle since Jimmy Carter’s term began in 1977”.
The daily A/D lines rose sharply on Friday as over 80% of the stocks in the S&P 500 and Nasdaq 100 were higher. It would take another day or two of similar action for the daily A/D lines to turn positive by moving above their MAs.
So if the market is bottoming which ETFs look the best from a technical standpoint? The table has many of the most popular ETFs with their weekly close and the Yearly Pivots that were recently discussed. These pivots are calculated from the price ranges in 2024.
Those ETFs that closed the week below their yearly are highlighted in yellow and as a result, have a questionable major trend. Several like QQQ, VHT and SMH could easily close back above the yearly pivot this week. Others like IWM and XLY are much further below their yearly pivots. The daily analysis of the OBV and RS will identify those ETFs that have the best potential on the long side.
My longer-term outlook is still positive for the stock market as long as the weekly A/D lines do not violate major weekly support. I see two likely scenarios for the next few weeks. One is for a 1-2 week rally back to strong retracement, moving average and pivot resistance before a drop back to or below last week’s lows as a bottom is formed similar to 2016. Given sentiment and oversold extremes another major decline does not look likely after a rebound.
The other alternative is a continuation of Friday’s rally that will eventually be strong enough to turn the A/D line analysis positive while moving the averages above key retracement resistance. Given the current levels of chaos, it is hard to determine a catalyst that could change the sentiment enough besides a truce in the Ukrainian conflict. For this scenario, I would not expect to see more than a one-day decline in the week ahead.
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