The market overcame the odds and continued to rally last week, gaining an average of about 3%. The numbers themselves look great, but before you pop the champagne, you should know the rally may have carried stocks a little too far for their own good, and a short-term pullback may be coming soon. More on that below. First up, the big picture.
Economic Calendar
As promised, the wave of economic announcements last week created fireworks. Without diving all the way into the details, here are the basics: incomes were up, but not as much as personal spending was, initial unemployment claims were low, as were continuing claims, basic industrial activity was up all around, the unemployment situation is holding steady, and…
… Consumer credit levels actually increased for the first time in months. It was only a $5 billion increase, but that’s better than the double-digit monthly declines we’ve been seeing for a couple of years. Makes sense, in light of stronger spending.
As for the coming week, there’s much less to contend with. In fact, the ball doesn’t even get rolling until Wednesday, with wholesale inventory levels. That, along with Friday’s business inventory levels, should give us some idea of potential demand for goods. It’s data worth watching, but nothing that should move the earth either way.
The biggies for the coming week will be the unemployment claims data on Thursday and Friday’s retail sales information. All eyes will be on the jobs numbers, as last week was the first week of hope all year long – claims have been drifting higher since early January. Retail sales could be a real powder keg as well, as several retailers have already reported outstanding February numbers. Of the 28 stores that have already posted last month’s numbers, they saw an average same-store sales increase of 4%.
NASDAQ Composite and NASDAQ VIX
Nice week. The NASDAQ jumped 1.48% on Friday to end the week 3.94% above the prior week’s close. It’s everything the bulls could ask for. At the same time though, the market is undeniably overbought by almost any measure imaginable. However, just because an oscillator is showing "overbought" doesn't mean a stock or index can't go more overbought or stay in that condition for some time. On the chart of the composite below, RSI as well as stochastic lines confirm it.
Be that as it may, even without the technically overbought situation, the rally is at growing degree of pullback risk. In that past five days the market has left behind not one but two gaps, and it would have been three were it not for Thursday’s intra-day retreat.
While the “no gap goes unfilled” theory doesn’t always hold water, in this case it’s probably going to hold true – given the circumstances. The NASDAQ is now 4.6% above its 20-day moving average line, which is about as extended as the index can get before being reeled in.
As if that weren’t enough of a worry, though the market rocketed higher on Friday, volume was actually pretty weak. The NASDAQ’s rally was also halted right at January’s peak level. Suspicious.
OTC and VXN Daily Chart
The VXN, however, still hasn’t hit the likely floor found at its lower Bollinger band. So, despite the challenges that are stacking up, we need to be careful about assuming a dip is night just because we’re overdue. While a pullback of some sort is impending, we may see the composite fall no further than the 20-day line at 2244. This is still a day-to-day affair.
Sector Performance:
Surprise, surprise, Basic Materials stocks won the week, as they have for most of them over the last year. Are they overbought? Sure, but it hasn’t stopped them yet. On the other end of the performance scale you’ll find utilities, telecom, and healthcare – the first two of which simply continued their pathetic performance.
With that said, though the numbers tell quite a bit of the story, sometimes a visualization can tell much more. With that in mind, here’s a percentage-change chart that essentially shows the same data, but better illustrates new or waning momentum. The start date is the March bottom from 2009… almost one year ago to the day. Financials and Basic Materials have led the way, while Telecom is the clear laggard.
Major Sector Performance Chart Since March 2009 Market Bottom
Style/Cap Performance
Small caps also continued their romp last week, with large caps lagging. Both are trends that have persisted for quite some time, and could continue to exist indefinitely.
And as we did with sectors, here’s a visual comparison of the market cap and style performance. Again, it may be better suited to show new and waning momentum. You can see that since the market bottom, Micro Cap and Small Cap Value have led the way, while Large Cap Growth is the clear laggard.
Market Cap and Growth/Value Performance Chart
Final Thoughts
With every day of progress the economy, as well as the market, makes the move back towards ‘normal’ trading. As such, we’re starting to see dynamics that are typical of a normal environment (not to mention trade-worthy). One of those dynamics is a performance divergence among sectors and market caps. That’s why we included the visualization charts this week – to start thinking about groups and sizes that are hot and cold.
Over the next few weeks we’ll start ‘drilling down’ into the winners and losers so we can really figure out what’s making the market tick, or not tick. Today was just an appetizer.
Disclosure: No positions
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