Saturday, February 7, 2015

Week in Review (2/2-2/6)

It was busy week with earnings announcements and a highly anticipated jobs number dominating the headlines.  The market was up 3% for the week but not without some volatility.  Below is a 60 minute chart of the S&P 500.  The index started the week at the bottom of its recent range only to rally all the way to the top end by Friday morning, which was a move of about 83 S&P points.  We briefly pierced the range to the upside only to stall and churn before falling into the Friday close.  We'll need more confirmation to upside to declare the choppiness to be in the rear view mirror.

A dominant theme was the post earnings moves in some big cap stocks.  These stocks holding onto their gains after big post announcement moves is a very healthy sign and needed for the uptrend to resume higher. However, the Greek debt situation resurfaced and caused some short term hysteria in the last half hour of trading on Wednesday and again Friday afternoon.  Clearly the market is reacting sharply to any headline risk as the choppiness continues.

Volatility as represented by the VIX came off recent excessive levels as equities rallied.  But one area where volatility swings continue to be huge is oil.  A major short squeeze created a big move off the bottom as the commodity traded above the 20 day moving average for the first time since its plunge began.  The daily chart below shows just how wild the swings have been.

Another positive sign has been the leadership exhibited by small and mid cap stocks.  The recent surge includes mid caps (MDY) making new 52 week highs.  We also got an expansion of new 20 day highs that accompanied price as the index tested the upper end of the range.  This expansion of highs is exactly what we want to see to help confirm an upside breakout.  This was the biggest expansion of 20 day highs since the move off the mid December bottom.  The A/D line has also made new highs which is a nice confirmation of breadth.

We'll continue to watch the macro forces battle it out and see how the market interprets Friday's jobs data over the next week.  The strength in financials (KRE, KBE, XLF) can be attributed to rates ticking higher.  Are we finally going to see rates steadily rise?  Only time will tell but we'll be watching the financials for clues.

Here are some of our favorite reads from the week:

  • Market due for a drop?

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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