Market Lab Report - Premarket Pulse 1/15/16
Major averages rose on higher volume as the much awaited bounce materialized. That said, a number of defensive names showed institutional accumulation, an unhealthy sign. There were a number of breakouts among utilities, an area of the market that can hardly be considered the stuff of dynamic leadership.
The downtrend remains intact as the market continues to trace out a major top with the Russell 2000 in bear market territory. It is also an ill omen that the market has twice corrected more than 10% in such a short span of time with a rally of at least 10% in between the two 10%+ corrections. Such occurrences are very rare and came before major bear markets in 1929, 2000, and 2008.
The pattern also occurred in late 1998 right before one of the largest bull market rallies in history. That said, assuming the Fed does not launch QE4, the odds dictate a nasty growling bear is long overdue at some point this year. Furthermore, the huge rally that began after the pattern occurred in late 1998 was supported by many leading stocks of the day, all of which were sporting healthy patterns. Today's leaders are very few and even the best of them look pale by comparison to the leaders of late 1998.
Network solutions company EQIX had a pocket pivot off its 50-day moving average. It resisted the last two 10%+ corrections in the NASDAQ Composite and is one of the first stocks to take an early lead toward new highs. Of course, we are still in a market where buying on weakness is a better strategy.
FB, one of the "FANG" stocks also had a pocket pivot. It bounced hard off its 200dma. Because of this straight up from the bottom pattern, it may very well pull back again allowed for a better entry point. Earnings and sales are accelerating, pretax margin 57.1%, institutional sponsorship has increased in every quarter since the company went public, group rank 14.
The market is still volatile, so the wait-and-see approach instead of buying anything right now may be a better strategy as we advised in yesterday's PPR report. The market bounce so far is lacking the upward thrust of prior bounces.
Indeed, futures are lower by about 2.5% more than wiping out yesterday's gains. Oil has fallen below $30 and China's Shanghai Composite Index fell another 3.55% overnight. Further, the Empire State factory index declined sharply in January, well below expectations, to its lowest level since the last recession that ended in 2009.
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