The weakness last week in U.S. stocks was entirely expected. As I mentioned in last weekend’s article, the technical condition had become quite overbought and the market was overdue to take a breather and pull back a bit. Also, our SectorCast rankings had moved from bullish to a more neutral bias. And then of course, there was uncertainty created by the most serious confrontation between Russia and the West since the Cold War — the looming referendum in Crimea to become independent from Ukraine and strengthen ties with Russia. Thus, stocks closed Friday with their biggest weekly drop in the last seven weeks.
Among the ten U.S. business sectors, the only sector that was up last week was Utilities (up about +2.4%), and other defensive sectors like Consumer Staples and Telecom were down only nominally. Also, Utilities have supplanted Healthcare as the leading sector year-to-date, up over +7%.
The CBOE Market Volatility Index (VIX), a.k.a. “fear gauge,†surged from 14.11 the prior Friday — when the market set a new high — to 17.82 last Friday. This is just another indication of investor trepidation ahead of the Crimean referendum.
To a lesser extent, the Federal Reserve is also on investors’ radar for this week as its FOMC meeting commences on Tuesday — the first with Janet Yellen as chairperson. The consensus view is that an additional $10 billion taper is a foregone conclusion at this meeting, and only a major economic threat would disrupt the planned tapering program.
Corporate earnings season is wrapping up, and quarterly earnings for the S&P 500 companies is up more than 9% versus the same quarter last year, with more than 60% of the firms beating expectations. There has been a pronounced weather effect on economic growth, but it has mainly impacted supply rather than demand, so we should see acceleration in growth as weather allows supply to catch up in coming quarters.
Not surprisingly, Crimea voted overwhelmingly on Sunday to secede from Ukraine and join Russia, although there is no provision for such a referendum in the Ukrainian constitution. It’s pretty crazy to consider that it was Khrushchev who arbitrarily gave Crimea to Ukraine 60 years ago, and now Putin wants to arbitrarily take it back. It seems that constitutions are just pieces of paper with little meaning in the big scheme of things. When times get difficult, people tend to prioritize bloodlines over borders.
Now, all eyes will be watching for the resulting fallout. This Crimean “brick†adds to ongoing concerns about growth in China and Fed tapering, among other issues of the day, in the market’s “wall of worry.†But bulls typically enjoy climbing the wall. I suspect this situation will be no different.
SPY chart review:
The SPDR S&P 500 Trust (SPY) closed Friday at 188.26, which is down 2% from the prior Friday’s close at a new high. As I said last week, the market was likely to lose its steam and pull back. The top of the rising channel indeed proved to be tough resistance and the oscillators were all extremely overbought such that the market desperately needed a breather to “reload.†There was also the bearish hanging man formation on the prior Friday and a gap up from March 4 that was acting like a magnet to be filled. Too many short-term bearish indicators were lining up. A healthy market will always take some time to fill gaps and test prior-resistance-turned-support levels, which serves to reinforce bullish conviction, and this is what we are seeing. The 20-day simple moving average failed to offer firm support despite a valiant attempt on Thursday, but the 50-day should prove much stronger if it is tested.
