Commentary: Paul Ebeling on Wall Street

Commentary: Paul Ebeling on Wall Street

$DIA $SPY $QQQ $RUTX $VXX

DJIA futures are little changed Sunday night, along with S&P 500 futures and NAS Comp futures. The stock market rally showed surprising strength last week, but it is not unprecedented. 

The stock market rally’s instant recovery from the coronavirus sell-off was surprising. Normally, when the stock market sells off fast, it takes time to recover, especially when the underlying concerns, the coronavirus and related economic impact in this case remain.

A strong stock market rally with a sharp, short pullback followed by a quick recovery to new highs does not mean unprecedented, as noted below, especially when the economy remains strong with good unemployment levels at all levels of the economy. ” says Bruce WD Barren, Chairman The EMCO/Hanover Group

Here are 2 of the numerous historical precedents.

In Y 1954, the DJIA suffered a sharp two-day pullback, but found support at the 50-day line. Stocks rebounded quickly. Within a few weeks the DJIA was back at record highs.

In early Y 1986, the NAS Comp abruptly pulled back to its 50-Day MA line, then quickly rebounded, though it took weeks to hit new highs. A few weeks earlier, the NAS Comp suffered a less-sudden retreat, but quickly shook it off. That compares to the start of Y 2020, when stocks shrugged off US-Iran tensions.

Last week in Review: Stock market marked record highs across the board

Technical Analysis

We saw new highs on the large-cap indices with the NAS Comp leading the way, really leading. 

NAS Comp: The NAS Comp gapped higher, closed near the session’s high ad showed strength to the close. It also showed better action than the Wednesday gap and fade because software stocks have stabilized.

S&P 500: It gapped higher for a 4th session runningand closed with a doji. It did not have as much strength after a 4-day Bull run because it had fallen to the 50-Day MA on the prior Friday.

Note: Thursday’s level of demand for the Fed’s $30-B in 2-wk repos was $57.25-B. This on Top of the almost $100-B that was demanded earlier in the week. When the going gets choppy, the big money users demand more liquidity. The fact that the Fed is still providing it can be seen when the market reverses breaks lower and turns them into rallies to new highs.

The stock market rallied to new heights last week, as investors looked past coronavirus concerns and drew support from positive fundamentals. The NAS Comp outperformed with a 4.0% weekly gainer, followed by the S&P 500 (+3.2%), DJIA e (+3.0%), and Russell 2000 (+2.7%).

The prevailing view was that the economy is fine and any negative impact resulting from the coronavirus will be minimal, based on economic actions taken by China, reports of progress being made toward a vaccine, and upbeat US economic data.

In other words, the buy-the-dip trade was backed by several positive developments last week.

10 of the 11 S&P 500 sectors contributed to the advance, especially the information technology (+4.5%) and materials (+4.2%) sectors. The utilities sector (-0.6%) lagged.

Data showed NFPs grow by 225,000 in January, the January ISM Manufacturing Index return into expansion territory after 5 months running of contraction, the ISM Non-Manufacturing Index accelerate for the 2nd straight month for January, and weekly jobless claims fell to their lowest level in 9 months.

China shored up confidence after it injected liquidity into its markets to help offset any impact from the coronavirus and said it will cut tariffs on $75-B of US imports by 50% on 14 February.

In addition, reports indicated that the People’s Bank of China is planning additional stimulus that will encourage lending activity.

The coronavirus is not in the rear-view mirror yet, as some companies like Walt Disney (DIS) and Nike (NKE) said it will have a negative impact on financial results, but the market is optimistic it will not get worse. Apple (APPL) for its part temporarily closed its China stores but shares still rose more than 3% this week.

Tesla (TSLA) was arguably the story stock of the week after shares rose as much as 48.9% in a span of less than two days in a short squeeze. Shares finished the week higher by 15.0%. Separately, Alphabet (GOOGL) reported revenue that was below expectations, but shares overcame the weakness.

US Treasuries finished the week lower, driving yields higher across the curve. The 2-yr yield increased 7 bpts to 1.39%, and the 10-yr yield increased 6 bpts to 1.58%.

The US Dollar Index (.DXY) rose 1.3% to 98.69.

WTI Crude Oil fell 2.4%, or $1.23, to 50.35 bbl, unable to draw bids from talk of possible OPEC+ production cuts.

IndexStarted WeekEnded WeekChange% ChangeYTD %
DJIA28256.0329102.51846.483.02.0
NAS Comp9150.949520.51369.574.06.1
S&P 5003225.523327.71102.193.23.0
Russell 20001614.061656.7842.722.6-0.7

Have a terrific week.

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Paul Ebeling

Paul A. Ebeling, a polymath, excels, in diverse fields of knowledge Including Pattern Recognition Analysis in Equities, Commodities and Foreign Exchange, and he it the author of "The Red Roadmaster's Technical Report on the US Major Market Indices, a highly regarded, weekly financial market commentary. He is a philosopher, issuing insights on a wide range of subjects to over a million cohorts. An international audience of opinion makers, business leaders, and global organizations recognize Ebeling as an expert.