Overview
I said last week that “earnings should drive prices for the next few weeks.”
Weak earnings from Goldman Sachs kicked off the selling, while weak earnings from Netflix triggered another tidal wave of selling. (Goldman Sachs also announced mega bonuses for their MDs and Partners this week.)
Inverse ETFs, which are short the market, rose quickly as volatility expanded. (They may be too volatile for most investors.)
The markets await the FOMC meeting next week, and perhaps that will help stabilize the markets, which may have over-reacted to the pace of Federal Reserve actions.
My net bull-bear balance correctly followed the market weakness, having turned negative on Jan 5th and remained in red since then.
Key Question
Is there more selling to come? The short answer is yes since the VIX index is still below its October highs.
Performance Review
The selling was intense, and thank goodness it was only a four-day week. Technology stocks got hammered, and small caps were definitely out of favor. This week, bonds barely broke even and were only as good as cash to offset the selling. On the other hand, gold was up about a percent, so it offered an offset, though it was also down Thursday and Friday. So the only real offset to this week was from inverse ETFs.
Our net bull-bear balance quickly turned down earlier this month and has stayed in the red, correctly showing the bearish market action. The Friday value below -70 is a bearish continuation signal.
The S&P-500 based SPY ETF has fallen below the key support we identified two weeks ago in the 445-450 zone. The next major support down is near the October lows. Since the VIX index of volatility is still below its October highs, a one-day spike to retest those values could lead to more selling next week and set up a retest of the 430 level.
The short-trade gains due to the spasm of selling this week are well illustrated by the TZA ETF, which is short the small-cap index. The rise is not getting somewhat overdone, but that does not mean it is over. As the markets dropped this week, the inverse ETFs as a group have rallied strongly.
Is there more selling to come?
The markets are oversold, but the FOMC meeting next week will be key to anticipating market actions. The market may have overestimated how quickly the FOMC wants to reduce liquidity. So it is certainly the FOMC coupled with better earnings that can help the market recover. However, the VIX index remains below its October highs, and hence another bout of selling is certainly possible.
The key to the symbols in the above chart is tabulated below.
A look at the listings on Thursday from our ETF Finder page showed that the inverse ETFs, such as BIS, LABD, RWM, TWM, and TZA, were near the top of the list when sorted by the composite trend strength (data as of Thursday).
Clearly, this week's only true offset was from inverse ETFs, but unfortunately, these are very volatile for most investors. So, one has to grin and bear it and await a bounce if one is long the indexes. What will the bounce look like? Next week, I will have a detailed analysis of the implications of this month, ending with losses for the S&P-500 index.
Wrap-up
My posts should give you a good starting point, with context and suggestions if you like to do research. Then, you can visit my website, chandeindicators.com, for more information and ideas. I hope you stay tuned and help by subscribing and recommending it to your friends and colleagues.
Thank you for spending some time with me.
Disclaimer
And now for some housekeeping. This publication is for “edutainment,” education, information, and entertainment purposes only. It is not to be construed as investment advice. Past performance is not necessarily indicative of future results. Our disclaimer at chandeindicators.com is included herein by reference.