Stock Market Early Morning Insights – March 24, 2016

One down day does not change the trends in the major market indexes, but there was some serious rotation that occurred yesterday. The most dramatic was a shift in the Energy Sector which had only 11 advancing stocks compared to 245 declining stocks. The equal dollar weighted Energy Sector Index was down 3.3% for the day.

The Biotech and Specialty Pharma rally which had been underway for three days also got hammered, although the Health Sector held up much better than the Energy Sector. The Materials Sector was also hit hard as gold futures continued to fall.

Several things happened yesterday to ignite the selloff. With the destruction in the energy stocks due to a much higher inventory build than expected, much of the rest of the market followed. Also, the strong Dollar Index contributed to weak oil and commodity prices including gold and silver. I had mentioned a few times over the past several days that gold appeared to be under distribution, that certainly happened yesterday. This morning, gold futures are holding somewhat steady and are testing for supply on relatively light volume. They traded as low as $1211.20, but are currently trading $10 higher at $1221.30.

Additionally, one of the Fed governors indicated that there may be a slight rate increase in April, but I think the main culprits for the selloff were the strong dollar and falling oil prices. Some headlines suggested the terror attacks in Brussels contributed to the selloff, but if so, why wasn’t there an extremely negative reaction on Tuesday, the day of the attacks? We always have to be wary of headlines and look for Intermarket relationships as the primary cause for movement in stocks and commodities.

There was a shift in leadership for the day as money flowed back into Utilities, REITs, and other defensive stocks. It was not a wholesale flight to safety, but the Utilities Sector seems to be the main beneficiary. What really stood out to me was the number of industry groups that turned negative based upon the two-day Force Index. 77 groups went from positive the day before to negative yesterday. That is a dramatic shift. The pie chart slices beneath the industry groups in the main part of this report show the shift from Tuesday to Wednesday if you take the time to compare the days.

This morning the dollar index is positive again, crude light futures are down over 2%, bonds are positive, and gold is trying to hold. We’re going into a three-day weekend with Good Friday tomorrow, so the markets are closed. With yesterday’s weakness and the uncertainty of potential terror attacks, traders may be reluctant to initiate or hold long trades over these three days. Personally, I am just going to sit tight on the few longs that I have initiated and see what happens next week.

At this point was stocks being so extended off of the low, the risk reward does not favor the Bulls even of the trends remain up. The S&P 600 small-cap’s, which have been very strong, generated an effort to fall VPA flag yesterday. Stock index futures are deteriorating as I write this.

Have a good weekend, and celebrate the positive things in life on this Easter Weekend.

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