Friday, January 11, 2019

Watchlist Update: Market Pulse, Sectors, NFLX



Market Pulse.


The apparent (and unclear) advances in the definition of the Trade War and a "new" FED, decidedly dovish, are sufficient arguments for Wall Street to continue resurging since its pullback at the end of 2018. The stock market seems not interested in the worrying 3-week shutdown of the US government, nor the economic slowdown of China and Europe (all its macro data of Industrial Production very bad this week): the SP500 SPX closes this week with a 2.5% advance, in its best 10-day rally in a decade. The oversold market in late December was already very strong and it was expected to reach important support (in this case its simple moving average SMA200 of weekly chart, shown two weeks ago, here) for the rebound to begin.

The "buy the dip" trades have been strong, so much that the market sentiment, measured by the American Asociation of individual Investors, with a bearish survey in December, now moved strongly to bullish sentiment, in line with its historical average. This week, the beginning of bank earnings (Citigroup C, Wells Fargo WFC, Goldman Sachs GS, JP Morgan JPM and Bank of America BAC) can serve as a guide to see if this new-year rally continues, on purpose, very usual in January, characterized by the low volume of transactions and rebalancing of portfolios.

The question is if this heavy rebound is consistent or is a single dead-cat-bounce of several days, part of a large fall. The answer, I repeat, will be given by the final resolution of the Trade War, there is no more. All the rest is speculation and particular interests that move the stock market upwards. But, it is precisely in these periods where a trader can obtain better benefits taking advantage of the high volatility and indecision of the market. Past are the months of November and December where I recommended to leave long positions: today (I believe in all January, have some doubts in February and March) the picture looks different. It seems we were in a "recovery mode", but we must always be very careful, it's not a return to a bullish bias. 

My contribution: I'm venturing some long positions in solid companies (as Netflix NFLX), probably for weeks, with a very tight stop loss. And this 2019 follow the value stocks, companies that earn high dividends with low P/E. In sectors, pay attention to the defensives as Health XLV and Staples XLP. I include some interesting companies of that sector in my last watchlist.  Finally, let's review some basic technical analysis of the key charts of the markets (SP500, Crude Oil, US Dollar, and the 10-year T-Bond yield), for this week.


- SP500 SPX: the daily chart shows its strong rebound that made it arrive, in only two weeks, at 38.2% of its Fibonacci, today turned into support, and goes for more: its next resistance is his key SMA50 that almost coincides with 50% of the Fibonacci. The fundamentals described above will be decisive in its behavior the next sessions.

- Crude Oil /CL: in rebound from the first session of the year, already exceeding the very important level of $50, today support. Aided by a data of low inventories at midweek and optimism for a US-China agreement that would raise its demand, Crude Oil is heading towards 38.2% of its Fibonacci at $55, with some resistance at its average SMA50 these last two sessions.


- US Dollar /DX ($DXY): I see it better on a 20-minute chart as it is quite volatile. This week is oscillating between the three main moving averages 50,100 and 200, but still above its Ichimoku cloud. It can lose strength in these days with the data of inflation decreasing, and the always latent risk of recession in the economy. But, 
on the other hand, main bank earnings and economic data that come this week (IP, Retail Sales, Housing) can give dollar, momentum if they come out positive.

- The 10-year US Treasury Bond yield TNX: in the monthly candle chart shown, it is very clear how powerful is the resistance of $3. Psychological, too. It could not overcome it and comes down to the 2.7% level, flattening the yield curve since December, with the risk of a recession that this brings. its bad reaction to Powell's speech was as expected, the same as the decreasing inflation data on Friday. Seems it could continue its bearish behavior. Do not forget the permanent reading of this index, a true gauge of the market.



The three "defensive" Sectors continue leading


This comparison chart shows the performance of the nine main sectors during 2018 and the first weeks of 2019. Show in blue sky is the SPX. As you see, the three default defensive sectors (Staples XLP, Health XLV, and Utilities XLU) continue leading this stock market. But if you compare with the last sector rotation chart I post here a month ago, the gap between sectors is tightening, signaling a probable change in the stock market bias. Also, the Sector Rotation Model, above in red, is now in -4.51 form the previous -7.51, another signal that the bullish traders should take note.



Netflix NFLX, $337.59


Monster rally in Netflix NFLX since the "Birdbox" phenomenon and its recent victory in the Golden Globe Awards: in only one week overcomes its three main moving averages and Ichimoku cloud. The MACD bullish divergence (yellow lines) is complete only when is confirmed by its EMA13 (in the yellow circle), and works fine during this week. Next level at $350, near its 61.8% of Fibonacci retracement. I'm long this week, despite its very overbought and its earnings on Monday.

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