Saturday, November 29, 2014

US Equity Market Week in Review For the Week of November 24-28

     One of the great benefits of having multiple equity averages is that they almost always confirm each other; for example, when the SPYs rally, the QQQs follow suit which implies the markets are most likely moving higher.  But this week we have a fascinating situation: the QQQs rallied, the SPYs moved sideways and the IWMs fell.  This essentially gives everybody from the most bullish to the most bearish something to base their opinions on.
     Let's start by looking at the SPYs:
First of all, remember this was a holiday shortened week with a shortened trading session on Friday.  But for most of the week prices remained in a narrow area between ~207 and 207.5.  Prices moved higher on Friday, but then trended lower for the last half of the trading session.
The daily chart shows prices gapping higher a week ago Friday in reaction to the ECB and PBOC adding stimulus followed by prices moving sideways. 
In contrast we see the QQQs, which moved higher for the first half of the week, gapped up on Friday's OPEC news and then sold off to a price near their open on Friday.
But on the daily chart prices clearly remain in an uptrend.
The IWMs mirrored the QQQs for most of the week, printing a slow by solid rally.  However, on Friday, prices sold off sharply, closing near their lows for the shortened trading week.
The daily IWM chart shows the sharp price drop on Friday.
     So -- what does all this mean?
     Let's begin the analysis by noting that odd things are more likely to happen in a holiday shortened week because there are fewer traders in the market.  And the sharp sell-off on the IWMs was most likely caused by no one wanting to hold a position over the weekend as a result of chaos in the oil market.  Assuming that to be the case, the most logical conclusion is the QQQs are driving the market higher and they will pull the SPYs and IWMs up over the next few weeks.  This makes more sense considering the overall stimulating effect of lower oil prices on the economy as a whole (which was also confirmed by the transports gapping higher on Friday as well).            
     But at the same time, we're still dealing with the limiting factor of a fairly expensive market as shown by this table from the Wall Street Journal:
The Dow is at 17 while the S&P is at 19.4 and the NASDAQ is at 25.  All three of these readings are high from a historical perspective and limit upside advances.