Threading a Needle Weekly Market Review April 04, 2020

Threading a Needle


Market indexes dropped in volatility and price this week which should tilt me to be bullish. With the $VIX still above 45, it is still very volatile out there. I am not a big $VIX follower, but being aware of the VIX trend in this elevated environment can be informative. The difficulty is the market was down 7.5% off its recent highs and the $VIX was still falling. In the old days a 7.5% drop would start a Markets In Turmoil Special Event on CNBC. The VIX (Volatility Index) typically rises as price falls. Changes in this tempo can help alert us to signs of an impending bottom. At this high level it is still too severe to suggest this is over.A low $VIX is 12.
The $SPX was down 2% on the week. The $NDX was down 1% in a week where 6.648 Million filed for unemployment. That is pretty stable as I think the news reports were twice as bad as expectations. Adding the initial claims to unemployed from 2 weeks ago(3.5%) suggests we are at 9.4% unemployment. A move above the level of 10.8% in 1982 puts us in the weakest consumer environment in a long time. A move above our current unemployment levels, other than 1982, was last seen in a depression era environment pre-war.
While the S&P 500 was only down 2% on the week, consider a simple scan of big moves across the broader markets.
• >10% up on the week = 200
• >5% but under 10% up on the week = 292
• >5% but under 10% down on the week = 993
• >10% down on the week = > 999
My takeaway from this is the rest of the market resumed falling away while the big names held up. Perhaps investors think the bad news is already baked in. Most of the oil and gas names would be in the big percentage up moves. The exploration and production ETF was up 8.8% on the week. However, the odds for finding a stock with a big move up was 1 in 5. My scan engine maxxes out at 999 for the number of stocks down 10%. Somewhere out there might be a winner as the picture implies.


With every pension fund strategy, portfolio manager strategy, 401k strategy, millenial strategy, relative strength strategy all targeted at the tech pool including software as a service, it continues to hold up. All the buy and hold strategies would hope so. If they have outperformed the $SPX on the move down, its probably due to the concentration of strategies from CFP’s and CFA’s all focused in the same area. That sounds good, but be aware of the texture changing.

One thing that I noticed that changed this week was the consumer discretionary ETF continued to make lower lows all week and became one of the weaker sectors in just the last few days. The mantra for the last 5 years has been the strength of the indebted consumer continuing to spend. With rapid unemployment arriving, my twitter feed had pictures that there were already lines at pawn shops and food banks expanding significantly. I discuss the change in XLY price action for the sector on the video.

Last week, I mentioned a downside tarket of 20 million people unemployed by summer from a former chief economist at the Bureau of labor statistics. That was a radical downside, worst case scenario a week ago. If the initial claims number on April 9th is just the average of the last two weeks, we will reach the radical downside target of last week. Imagine what that says about the summer target. The market is not going to wait for the last person to claim, but at this point, the parade of numbers is not even remotely close to what we thought only 2 weeks ago. The longer this self isolation is happening, the more difficult the return is as companies go bankrupt.

The Schnell Strength index climbed off the floor of 0 to 1%, as gold miners are trying to hold up here. Abysmal.

Banks continue to drown optimism with a cold shower day after day. The KBE ETF, holding the US banks, settled down 11% on the WEEK. Gulp. The EUFN European Bank ETF was equally dreadful.

Oil related names will be a wild ride this week. As the base in oil starts to form we’ll be looking to pick lows in the industry over the coming weeks/months. We have to get three of the largest players in the world to agree and then we need another 20 countries to agree. No small feat based on how long the China negotiations went on.

Summary: If we do start to turn up here, I would allocate 1/3 of my portfolio to the move with stops underneath. Unfortunately, my bias through the bank charts is to be worried about something bigger on the downside coming. Always be open to either way.
Let’s jump into the charts.



The Schnell Strength Index continues to signal no change yet. Stay defensive. That does not mean moving into defensive stocks. At the lows these defensives names will be sold when the world rotates to growth again. They will probably sell off if we have another leg down and when sold on the final leg down, they won’t be bought up as the big money will move to risk on. See 2007.



I usually talk about the weekly charts. Between Tuesday and Wednesday, we moved more than the entire range of January so that is why I am reverting to hourly charts. The drop on April 1st would have triggered a Markets in Turmoil Special on CNBC in January. The PPO is below zero and is sitting on a best fit uptrend line. If this uptrend in momentum breaks here, I would suggest another test of our lows on March 23rd is in order. Conversely, if the big downtrend in price breaks skyward, that is a pretty bullish setup. We are at the next decision point. Banks are so weak, I expect down. But the market goes where it wants, not where I expect it to go. Link




The volume has declined almost every day since we marked the lows. When will we see the bulls start pushing higher with volume? So far none of the buying days (up days) exceeded the previous down days. Thursday was an indecisive inside day, as it had a higher low and a lower high. Friday was an indecisive outside bar. Higher high, lower low, closed in the lower half. Link. Indecision.



The oscillator is in the middle panel, with the summation index in the top panel. The oscillator is like a momentum calculation for the advance/decline line. The momentum has already rolled over into negative territory again. Momentum usually softens first. Just another reason for me to expect more downward energy. Also, notice the difference in the Summation Index in the top panel which keeps a running total. See how it launched at the end of December 2018? We are already pausing after the big push. More caution.



The news is bleak out there for banks. As millions miss their April mortgage payments, companies miss their rent payments, and landlords are squeezed from multiple tenants at the same time, the pressure flowing up to the banks literally swarmed within a month. No one was talking about missed payments as we rolled from February to March. Bank price action is horrible with the lowest weekly close. Link.



The weekend has European Governments racing for a Marshall Plan to rejuvenate the situation in Europe. With it comes the always hopeful plan of Euro area bonds rather than country specific bonds as Spain, Italy, and Greece all have trouble. France is only marginally better according to a Bloomberg article. The European bank chart plummeted this week, closing down 10% near the lows. In a calm week on the indexes this is difficult. Can we assume these mortgage payments will restart around the world soon? No.



This daily chart of the XLY is one of the weakest sector charts over the last three days visually. The problem is the lows are not holding and each day a lower low is made. In the USA where consumption is the driving force for 70% of the economy, high unemployment will be extremely hard on this sector until the jobs come back. As the awareness of the dismal employment picture spreads, this typically strong leadership group appears to be in trouble. The full stochastics never pushed up into the 80% level and needs to hold above 50. That looks doubtful.



Warren Buffett has made a lot of his money buying near bottoms, but he has also struggled along with the rest of the investing world. Apple worked out well, but Kraft Heinz, Oil and the airlines are some of the bigger hits he has taken. This week he lightened his positions in airlines, and it is interesting as I had noted when he was buying in. I wondered why a smart guy like Buffett would buy into an industry that hasn’t done anything for years. Ouch. Airline Index. Warren selling at the lows? Not usually.



The 30-year bond price has been climbing for 15 months. This chart also illustrates the difference between using the MACD and the PPO to study momentum. Notice in the high unemployment period of 1982, bond yields showed a big surge on the MACD. Because the current price is so much higher now, the MACD is making larger waves now. The PPO uses percentages and can compare at different price levels. 1982 was the last time we had unemployment near 10%. Look how high the PPO wave went! Will we test that? I thought the last surge would mark the bond market top as an exhaustion surge. My bad. This continues to soar. Link



If the market can hold in here, a significant number of the leadership names are hovering around the 200-day moving average. If the market can rally from here, this would be a natural demarcation point for the lows. Conversely, the failure to not hold the 200 DMA after bouncing up from below is a classic technical signal of big downside. Markets typically back test the underside of the 200 DMA before breaking down. In this case the indexes are way below that level. It will be important to watch how the big names behave where the crowd is huddled for the next few weeks. If these big names start breaking down hard, this level is usually an inflection point for large institutional investors to reduce positions. Link. The purple area chart will probably break if that happens, but I also thought that purple trend break would happen near the top.



The US market is on the left and the Canadian market is on the right. Energy was the story with the big bounce in crude. I wrote about it in the Chartwatchers article. The SCTR ranking shows us Staples and Healthcare outperforming. That doesn’t mean up but they were up this week. Be careful of the salesman selling you a great stock to buy in the middle of a bear market.



On the left, the world indexes were mostly negative, but Australia and Russia had big weeks. In commodities, they broadly underperformed with the exception of crude oil, up 30% from last week’s close and 50% from the lows. Watch Japan closely.



The monthly conference call for members was held on zoom software April 1 at 5 PM ET. Here is the April recording. April.
Here is the link to this week’s chart list. Weekly Charts
Here is a link to this week’s video. Threading A Needle

Good trading,
Greg Schnell, CMT, MFTA.


Good trading,
Greg Schnell, CMT, MFTA.