The market dip-buyers were active for much of last week as the economic data was much stronger than anyone expected. The Retail Sales, in particular, was surprising, reporting 5.3% instead of the expected 1.2%. The Empire State Manufacturing Index came in at 12.1, (expectations were at 5.9) and the Philadelphia Fed Manufacturing Index came in at 23.1 (against the expected 19.2).

The hourly close-only chart of the S&P 500 reveals that it was a pretty wild ride. The S&P 500 had a high of 3950.43 in the first hour of trading Monday but then closed the day a bit lower at 3932.59. The pattern was reversed on Wednesday, as the S&P 500 opened lower and then closed near the highs. This was also the pattern on Thursday, and the prior weekly low was violated before stocks turned higher.

However, the spike in yields on Friday made the dip-buyers a bit more cautious, as the yield on the 10 Year T-Note closed at the highest level since February 24, 2020. Since the start of the year, yields have risen 0.91% to a close last week of 1.34%. The rapid increase in yields may create worry among investors, despite seeing similar levels in February 2020.

Most of the markets closed lower for the week, though the Dow Jones Transportation Average did manage to gain 0.8% while the Dow Jones Industrials were up 0.1%. The big losers were the tech stocks, as the Nasdaq 100 was down 1.6%, and the SPDR Gold Trust lost 2.2%. Both were hurt by higher yields.

For the week the iShares Russell 1000 Value ETF (IWD) was up .20% while the iShares Russell 1000 (IWF) was down 1.7%. The higher rates gave the financial stocks another boost to the upside as the Financial Select Sector (XLF) was up 2.8% for the week.

In January, I reviewed the data from the monthly Bank of America global fund manager survey, which indicated fund managers were taking a record-high level of risk and their cash levels were quite low.

In the latest survey, which was conducted from February 5-11, they are even more bullish. The financial press has gone wild over the quote from BofA’s Michael Hartnett that “[The] only reason to be bearish is…there is no reason to be bearish.” The allocation to stocks is the highest since February 2011.

The daily chart of the Spyder Trust (SPY) shows that it rallied in the first part of February 2011 and reached a high of $111.39 on February 18, 2011. By the March 16 low (point c), the SPY had dropped 6.9% in seventeen days. According to the data from the American Association of Individual Investors (AAII) the Bullish % went from 51.5% on February 3, 2011, to 28.5% on March 27.

On the chart, it is interesting to note that on the second and third days of the decline in February the SPY dropped below its starc- band (point a). As is often the case using starc bands, the SPY then rebounded for several days (point b) before the selling resumed. This bounce provided a good opportunity to sell longs or to establish short positions. By early May of 2011, the SPY was making new highs.

Returning to the present, the Invesco QQQ Trust (QQQ) made a new high of $338.19 on Tuesday, but then dropped to a low of $328.36 on Thursday, as the 20-day exponential moving average (EMA) at $328.83 was reached. The daily support (line a) was briefly broken in late January, and is now at $325.55. The late January low was $312.76, which is now the support level to watch. There is also longer-term support at $303.07 (line b).

The Nasdaq 100 Advance/Decline made a new high on Friday, February 12. It has now pulled back, but is still above its weighted moving average (WMA). The A/D line has initial support at the late January lows with more important at its uptrend (line c). The daily On Balance Volume (OBV) did not make a new high with the A/D line, and has dropped below its WMA. This reflects that volume increased on the decline late in the week. There is next support at the October 2020 high (line d).

Crude oil closed a bit lower last week after making a new rebound high. As I mentioned last week, this market is quite extended on the upside. Gold, on the other hand, has continued to decline, as noted by the drop last week of 2.2% in the Spyder Gold Trust (GLD).

The Comex Gold futures contract was down 2.5% last week, dropping below the December lows. The 38.2% Fibonacci support from the August 2018 low is at 1728.4, which is 2.8% below Friday’s close. The 50% support is at 1620.4, and corrections often terminate between the 38.2% and the 50% support levels. The declining 20-week EMA is now at 1841.8, which represents strong resistance.

Comex Gold’s weekly OBV decisively broke its uptrend (line a) at the end of January and is now in a clear downtrend. It is also below its declining WMA. The Herrick Payoff Index (HPI) is a key indicator in determining the direction of commodity prices. Comex Gold’s HPI dropped below the zero-line on January 15 and then violated its support from the 2020 low (line b). The daily OBV and HPI (both not shown) have not yet made new lows with gold prices, so I am watching the action in Comex Gold and GLD closely.

It is still my view that a deeper decline is needed to reduce the high level of bullishness and complacency in the market. Therefore, I would be raising cash ahead of a correction. The market can still move higher before a correction, but one is likely in the next month. Such a decline should present a good buying opportunity for selected ETFs and stocks.

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