Morning Comment: Crucial Day For The Stock Market....Oil Ripe For A Breather

The stock market had another rough day yesterday…and all of the major averages got hit especially hard late in the day. This caused them all to close on their lows of the day. That said, the “internals” were not as bad yesterday…as they were on Tuesday. The composite volume was actually lower (which is a surprise…because the first day of a trading week tends to have the lowest volume of the week). Also, the breadth was not anywhere near as bad. It was 3 to 1 negative for the S&P 500 (vs almost 8 to 1 negative on Tuesday)…it was just over 2 to 1 negative on the Nasdaq Composite (vs. more than 5 to 1 negative on Tuesday)…it was less than 2 to 1 negative for the NDX Nasdaq 100 Index (vs. more than 13 to 1 negative on Tuesday)…and it was 4 to 1 negative for the Russell 2000 (vs almost 13 to 1 negative on Tuesday).

In other words, even though yesterday was not a good day for the stock market whatsoever…and even though it closed on its lows for the day…it actually showed some signs that the selling pressure is fading a little bit…at least over the very-near-term.

The late day sell-off did take the S&P 500 below its 100-DMA…and the Nasdaq Composite further below its 200-DMA. However, the NDX Nasdaq 100 is still slightly above its own 200-DMA…and we need to point out that the S&P 500 has only broken very slightly below that 100-DMA. As we have mentioned many times in recent weeks, the 100-DMA has been VERY strong support for the S&P for over a year, BUT we have also highlighted that it has broken slightly below that line a couple of times…only to regain the line very quickly. Therefore, we have said that it would be important to see a “meaningful” break below the 100-DMA before it would raise a big warning flag on the broad market. Thus, if (repeat, IF) the S&P can bounce quickly and strongly today, this move would still be considered a successful test of this key moving average. (First chart below.)

Right now, the futures are trading solidly higher, but as we learned yesterday, a positive “opening” does not insure a sustained rally throughout the rest of the day. Therefore, the stock market is still sitting a very important juncture. If this morning’s strength fades…and we roll-over in a significant way once again (like we did yesterday)…it will take the S&P 500 well below its 100-DMA and the NDX below its 200-DMA (and the Russell 2000 even further below its multi-month sideways range that we highlighted yesterday).

THAT would not be good at all for the stock market, so even though the “internals” from yesterday give us some reasons to think that this morning’s strength will gain some momentum, we are still at a critical juncture for the stock market on a near-term basis. Any further (immediate) downside follow-through could create a cascading effect on the stock market…and thus investors and traders alike will have to remain quite nimble today.

One area that could give us some relief is the oil market. WTI crude is trading slightly lower this morning…and it is coming off an overbought condition. We remain quite bullish on crude oil (and the energy stocks), but there are some signs that if could see a short-term pullback. First, as we just mentioned, it has become quite overbought…with its RSI chart moving above 70 yesterday. Second, the energy stocks actually fell yesterday…despite the fact that crude oil rallied nicely once again. (The XLE fell 0.74% and the XOP declined 1.2%.) No, a one-day divergence does not raise a big yellow flag, but experience tells us that when oil gets overbought and the energy stocks start to underperform its underlying commodity, it tends to tell us that crude oil (and the energy stocks) are due for a short-term pullback…or at least a breather.

With this in mind, we would avoid chasing the energy stocks at this time. Don’t get us wrong, we are still VERY bullish on the sector on an intermediate and long-term basis. However, nothing moves in a straight line in the markets…and we think that this group is getting ready for a pullback. Thus, we think investors should look to buy these names on weakness over the next week or two…rather than chase them in an aggressive manner. (Second chart below.)

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Jan 20, 2022 — 9:01 AM
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