Weakness in Technology and Financial Sectors Continues Heavy Selling in U.S. Equity Markets

U.S. Equity Markets

I am currently on the sidelines in the U.S. equity markets.

I am waiting for the U.S. equity markets to get to an extreme oversold condition where I would look to buy the exchange traded funds which mirror the U.S. equity markets and then take advantage of a snapback rally. These exchange traded funds include SPY (mirrors the S&P 500), DIA (mirrors the Dow Jones Industrial Average), IWM (mirrors the Russell 2000), and QQQ (mirrors the NASDAQ-Composite). I am looking for a similar situation to the extreme oversold condition when the S&P 500 futures traded down to a low of 1,804.25 and were over 140 points below the 10-bar moving average on the daily chart. From that extreme oversold condition the S&P futures rallied about 130 points and the Dow Jones Industrial Average rallied over 1,200 points in only a week and a half.

On Friday we saw heavy selling in both the technology and financial sectors. We saw that heavy selling continue in both sectors today, leading to heavy selling in the U.S. equity markets. The XLF (Financial Sector ETF) closed down 2.53% and the XLK (Technology Sector ETF) closed down 1.44%.

At one point today the Dow Jones Industrial average was down around 400 points before a late afternoon rally erased over 200 points of the losses. The Dow Jones Industrial Average closed down 177.92 (1.10%) at 16,027.05, the NASDAQ Composite closed down 79.39 (1.82%) at 4,283.75, the S&P 500 closed down 26.61 (1.42%) at 1,853.44, and the Russell-2000 closed down 16.28 (1.65%) at 969.34.

Federal Reserve Chair Janet Yellen will be speaking in front of congress this Wednesday and Thursday. I expect dovish comments and for the U.S. equity markets to stabilize into these meetings. I was watching a financial show last night and their theme for 2016 is negative interest rates. The Federal Reserve would consider going to negative rates if the economy worsens. After the Federal Reserve raised interest rates in December they stated that they were optimistic about the U.S. economy in 2016 and would potentially raise interest rates four times in 2016. It is very troublesome that the Federal Reserve is considering negative interest rates. The U.S. has never gone to negative interest rates. It has not been shown that negative interest rates are effective and if that is all the Federal Reserve has up their sleeve then I think the U.S. equity markets are in severe trouble.

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Crude Oil

I am currently on the sidelines in crude oil.

The low in crude oil for 2016 is 27.56. I think there is a good chance crude oil will make a new low and possibly push down into the low 20 range. This week’s cover of Barron’s displays a barrel of oil on which “Here Comes $20 Oil” was written. Everyone is now jumping on the bandwagon that crude oil is going down to 20 a barrel. If crude oil does get down to that level I believe it will be short lived as OPEC would then decide to cut production, pushing back up crude oil prices.

Crude oil was down 0.88 (2.84%) today, closing at 30.12. Although crude oil was down today, oil stocks such as XOM (Exxon), CVX (Chevron), and HES (Hess) were up on the day. I am seeing a divergence between oil stocks and the actual commodity.

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Gold

I am currently on the sidelines in gold.

I have a buy signal for gold on both the daily and weekly charts. I am waiting for gold to pull in and get to an oversold condition on the daily chart to set up a great long pattern where I would look to buy ABX (Barrick Gold), NEM (Newmont Mining), and GLD (Gold ETF).

Gold traded above the 1200 level today before closing up 15.50 (1.32%) at 1189.60. ABX (Barrick Gold) and NEM (Newmont Mining) opened up strongly today, however when gold made new highs today ABX and NEM did not make new highs. I am seeing a negative divergence between the gold stocks and the actual commodity. This is a sign that these stocks are going to pull in.

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Thank you,

Stephen Kalayjian
@stevekalayjian

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