Stocks sold off sharply during the last two trading days of the past week, possibly spooked ahead of this week’s 2 day FOMC meeting and the possible further withdrawal of stimulus measures. Whatever the reason, stocks broke sharply lower and took out short-term support in the process. Whilst the long-term trend is still very much up, the extent of the 2-day sell-off will raise questions as to whether the all time high posted at the end of last year will hold for the foreseeable future.
The S&P 500 failed to clear the all time high posted on 31st December 2013. Having bumped its head against resistance from all time highs numerous times since the start of the year, with the final failure being made on Thursday, forming a double top, with the intervening low being broken on Friday. The Dow 30 lost a massive 579.45 points this week, for a 3.5% weekly decline. The Nasdaq 100 made a double close key reversal at weekly chart level, which is also bearish. Short-term indicators therefore all point to further weakness in the near term.
Historical stock market buffs will be well aware of the January stock market barometer, which states that as goes January, so goes the rest of the year. As we enter the last week of January with stocks considerably off their open for the year, the odds favour a lower close for January. This barometer has an 88.9% accuracy ratio so there could be a bear market ahead, something that is very contrary to the vast amount of popular opinion.
Commodities have been mixed with several markets continuing to slide. Sugar fell to new 3 ½ year lows and wheat came within a quarter of a cent of new lows. The biggest move of the week came from natural gas, which shot higher by a huge 19.37%. This move took out a couple of key resistance levels to reach its highest level since late 2011. The 200 week moving average, which is a very long-term indicator is not far above last week’s high and that represents a likely target for this week. Natural gas has been below this level since 2008 where it made a brief move above that average that lasted only a week. To see some continuous trade above that average one has to go back to 2005, such is the extent of the long-term decline.
In a normal market stock indexes and the dollar are inversely correlated, so a decline in stocks is generally met with a rise in the dollar. This has not been seen this week. The long-term trend basis the dollar index is still down and remains below the key 8200 level. Weakness in the dollar suggests that the markets believe that stimulus and low rates may be with us for longer than was previously expected. The index now sits almost exactly in the middle of the recent range.
The dollar did not decline across the board though, and did advance against the riskier commodity based currencies, but fell against the safe haven Swiss franc and Japanese yen. This is very much in line with a move towards risk-off
Interest rate futures
The long-term trend is still down for the 10-year T note and the 30 year T bond but that could change if stocks continue with their sell-off from last week, which would lead to further rises in the long bond. A change of trend to up is within range should strength continue. The rise for the 30-year bond from the start of the year is a move towards risk off, and it is of interest that it occurred ahead of this past week’s stock sell-off. The shorter-term interest rate markets all still remain in a long-term uptrend and may be joined by the 10-year note and long bond soon.