The carnage in the financial stocks last week was as bad or worse than most expected and the level of volatility in the bond market stayed at extreme levels. Kit Juckes, FX analyst at Société Générale commented that “these levels of bond market volatility are dangerous and unsustainable.” The MOVE Index that tracks U.S. Treasuries volatility has reached levels last seen in 2009.
This is evident in this long-term monthly chart of the MOVE Index from Yahoo/Finance. The Index closed last week at 180. It reached a high of 223 in December 2008 but I am not drawing any parallels as there are many differences between 2008 and now.
Record-breaking price action always makes some parts of the market segment nervous and that is the case now. The decline in yield was likely magnified by the fact that by early February the COT data revealed that hedge funds held a “massive short position in two-year U.S. Treasuries futures.” There was a delay last month in the submission of data to the COT but my charts indicate over a 250,000 contract decline in the open interest.
It was not a surprise that the SPDR S&P Regional Bank ETF (KRE) dropped 14% last week to close at $43.44. On March 3rd, KRE closed at $60.38 so it has seen a drop of 28% in the past two weeks. Of course, banks in the cross hairs like First Republic Bank (FRC), have dropped 81% in the same period. This is a good example of the comparative risk and reward of individual stocks versus an ETF as FRC is a 1.7% holding in KRE.
The surprise from last week was the mixed performance in the key markets. The Nasdaq 100 Index was up an impressive 5.8% and is now up 14.4% year-to-date (YTD). The gain was almost matched by the 5.7% gain in the SPDR Gold Trust (GLD). The Dow Jones Utility Average was up 4% but it is still negative YTD.
The S&P 500 was up 1.4% for the week even though it declined 1.1% on Friday. The Dow Jones Transportation Average lost 3.1% last week a bit worse than the 2.8% decline in the iShares Russell 2000 which has 16.5% in the financial sector.
It was another negative week for the NYSE market internals with 942 advancing issues and 2273 declining issues. The December lows at 14,886 that were targeted last week have been violated as the starc- band was exceeded. The 20 week EMA at 15,343 has turned lower.
The NYSE All Advance/Decline line after violating its WMA has now closed below the support at line c. This is a usual development after the yearlong downtrend, line b, was broken at the start of the year. A very strong multi-week rally is needed to reverse this deterioration.
The Invesco QQQ Trust (QQQ) chart looks much different after last week’s strong close above the prior week’s high. The weekly starc+ band is at $327.07 with the 50% resistance at $331.49. The daily chart (not shown) reveals that the monthly R2 at $308.14 and the daily starc+ were exceeded on Friday. This suggests we could see a pullback to the pivot at $299.10 and the rising 20 day EMA at $297.55. There is weekly chart support in the $285 area.
The weekly Nasdaq 100 A/D line has turned higher but is still well below its WMA and the major downtrend at line b. The weekly relative performance (RS) moved above its WMA on January 27th which indicated it was leading the S&P 500. The downtrend, line c, was subsequently overcome with the RS moving sharply higher last week.
It was a mixed week for the sectors as six were up over 1% led by the 5.66% gain in the Technology Sector with the Communications Services Sector (XLC) up 5.26%. The other top four performing sector ETFs had decent gains even the beaten-down HealthCare Select (XLV) was up 1.38%.
As for the losing sectors the Energy Sector (XLE) as it was down 6.85% for the week, worse than the 5.92% decline in the Financial Sector (XLF). Two of the favored ETFs in early 2023, the Materials Select (XLB) and the Industrials Select (XLI) also had significant losses. They violated important support last week that could trigger additional selling.
The break in crude oil futures last week and decline of 12.7% violated support going back through 2022. XLE dropped below its weekly starc band so is getting oversold as the support at line b, has also been reached. So far the 2022 lows in XLE in the $65-$68 area are holding. There is resistance for XLE now in the $80-$82 area.
The weekly RS had formed lower highs since last October and is close now to breaking the more important support at line c.. The volume was the heaviest since last June and the OBV which recently made a new high has dropped below its WMA. There is major OBV support at line d.
Both crude oil and energy stocks are likely to see an oversold rally in the next few weeks. If the rebound is not accompanied by strong volume then it is likely to be a failing rally.
The focus this week will be on the FOMC meeting along with concerns over any new developments in the banking sector. Parts of the stock market are still oversold so they could rebound in the next week while the growth stocks could see some profit-taking as many are overextended.