Bearish Engulfing Candles Appear on All Indexes

Market Moves

The major indexes opened higher at the start of trading, despite a lower-than-forecast number from the Non-Farm Payroll report, only to close the session at lower levels than the previous day. The result of this price action is a candle formation well known to chart readers as a bearish engulfing pattern. The pattern appeared on all three major indexes, giving traders pause to consider what might be in store for the markets next week. The S&P 500 index (SPX) opened at a historic high, again, but closed the day 0.3% lower than yesterday's close.

The pullback in prices created an interesting aspect on the chart below. This chart is a comparison of the relative strength between the S&P 500 index and the Dow Jones Utility Average index (DJU). If the prices are moving up, it means that investors are choosing to take risks rather than play it safe. The price action recently broke resistance but came back to retest that level today, signaling that investors may be having second thoughts.

Chart showing the performance of the S&P 500 vs. utilities

Inside the Industrial Sector

As earnings season begins next week, stocks will react to the first news of how corporations fared in 2019. One sector has an additional factor to consider. Industrial sector stocks, many of which are involved in the defense industry, have attracted investor attention lately in light of today's geopolitical complexities.

The chart below depicts the top holdings within State Street's sector index ETF for industrial manufacturing companies (XLI). Apart from The Boeing Company (BA) at the bottom of the chart, the remaining five have shown strong performance over the past quarter including Caterpillar Inc. (CAT), United Technologies Corporation (UTX), Honeywell Inc. (HON), Lockheed Martin Corporation (LMT), and 3M Corporation (MMM).

The importance of the performance of these stocks is that it shows investors are not only interested in buying technology and finance sector stocks, which tend to lead upward breakouts, but they are also interested in the core sectors of the economy. This portends a potentially broad and lengthy upward move for the stock market in general.

Chart showing the performance of the industrial sector

Small Caps Retreat

Additional evidence of growing investor reticence can be found in the chart below. January is often considered to be a month that favors small-cap stocks; however, that phenomenon has yet to surface in 2020. In fact, over the past three weeks, the small- and micro-cap stocks can be seen to be losing ground in comparison to more heavily capitalized companies.

The importance of this information is that, in conjunction with a bearish engulfing pattern, it may be the case that investors will begin to favor less riskier stocks in the near future. Larger and more established companies may attract more investors in the coming days.

Chart showing the performance of small-cap stocks

The Bottom Line

Stock indexes briefly touched new highs before retreating to engulf the previous day's price action. Small-cap stocks also continue to lose ground to larger companies in the short term. The industrial sector stocks may be poised to grab investor attention in the days to come.

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