Stocks Rebound On Stimulus Package
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
After the DJIA turned in its worst weekly performance since 2008, down -17.3%, investors were hoping for some relief this week. A surprise expansion of market intervention on Monday by the Federal Reserve, to buy unlimited Treasuries, combined with massive amounts of stimulus by the IMF, should have stopped the bleeding. Unfortunately, partisan bickering in Congress put the relief stimulus package briefly on hold and the major averages put in a new bottom to start the week, leaving the Dow down -37% from its peak on 2/12/20. The stock market snapped back on Tuesday however, as China unleashed a major stimulus bill, G-7 nations pledged to do what it takes, and Congress was set to pass a $2 trillion stimulus bill to ward off the impact of Covid-19 on global economies. The DJIA surged 3960.24-points (+21.3%), its strongest three-day rally since 1933 on the news, and closed at 22552.17. The Dow, S&P 500 and NASDAQ retraced about 38.2% of the total selloff from their highs before running into resistance and drifting lower ahead of the weekend. Every sector was sharply higher led by beaten up Utilities (XLU), Industrials (XLI), REITs (XLRE), Consumer Discretionary (XLY) and Financials (XLF). Gold also rallied during the week adding about +10%, while lack of demand and oversupply kept crude oil prices hovering near $20 a barrel. Despite the positive week, volatility remained excessive and the VIX, which measures fear in the market, finished the week at 65.54, indicating that traders were expecting more selling pressure on markets next week. Despite a positive week, investors were reluctant to stay Long over the weekend and the major averages were sold for a 10th straight Friday.
For the period, the DJIA surged 2462.80 points (+12.8%) and closed at 21636.78. The S&P 500 picked up 236.55 points (+10.3%) to finish at 2541.47. The NASDAQ jumped 622.86 points (+9.1%) and finished at 7502.38, while the small cap Russell 2000 added 117.94 points (+11.6%) and closed at 1131.99.
Market Outlook:The technical condition of the market improved last week but remained weak. The selloff had left the major averages in deeply oversold territory and the strong snap back rally ran out of steam at resistance after retracing 38.2% of the selloff from the highs. The technical indicators improved but were in negative ground and the different indexes finished the period in Bear market territory. A Death Cross, where the 50-day moving average crosses below the 200-day moving average (MA) on the DJIA and S&P 500 was also a negative for the market. However, over the last 10-years, the market has put in a bottom shortly after that technical sell signal has taken place. The DJ Transportation Index and Russell 2000, which tend to lead the market both higher and lower, slightly outperformed the broader market this week, but both are still down about -40% from their highs. Positive divergence in these indexes would be constructive for the broader market going forward. Finally, breadth showed some positive divergence for a second week in a row. Breadth is looked at as a leading indicator of market direction and improving NYSE and NASDAQ Advance/Decline lines and contraction in the number of new 52-week lows, though they remain bearish, hints that a bottom may have been put in on Monday.
Subscribers to Market Edge have an edge as to when to get back into the market in what looks like could be a historically opportune time to buy stocks. The best way to use Market Edge is to make a list of fundamentally, strong stocks that you like and put them in a Stock Watch list. Wait for the stock’s Opinion to be upgraded to Long or for it to become an Early-Entry Buy candidate. This will take the guesswork out of the buying process. The Market Edge Opinions contain several technical indicators which are weighted in such a way so as to produce the Power Rating (PR), a number that can vary between -55 to +100. Depending on the PR value, the Opinion will be either Long, Neutral or Avoid. One of the components of the Power Rating is our proprietary Up/Down Volume Slope (U/D Slope) which identifies conditions where by the smart or informed money is placing big bets, a good thing to know. Trying to catch a falling knife can be a disaster. Our approach will not get you in at the exact bottom but leaving 5% – 10% on the table is much better than getting clobbered AGAIN! At some point this madness will stop and a great buying opportunity will be at hand.
Cyclical Trend Index (CTI): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times.
Presently the CTI is Positive at +1. The counts for Cycles A, B, C and D are bullish while the count for Cycle E is bearish.
Momentum Index (MI): The market’s momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish.
The Momentum Index is Neutral at -2, up two notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 3279 units while the number of new 52-week lows out did the new highs on all five days. Breadth was also mixed at the NASDAQ as the A/D line added 3281 units while the number of new lows beat the new highs on each day. Finally, the percentage of stocks above their 50-day moving average rose to 6.4% vs. 4.6% the previous week, while those above their 200-day moving average increased to 9.1% vs. 6.0%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the market’s Bullish or Bearish sentiment is important when attempting to determine the market’s future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. In addition, we track money flows into and out of Equity Funds and ETFs which as of 3/25/20 shows outflows of $27.1 billion. Currently, the Sentiment Index is Positive at +7, unchanged from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Neutral as of the week ending 2/28/2020 (DJIA – 25409.36). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
Industry Group Rankings : What’s Hot (0) – What’s Not (91). Of the 91 Industry Groups that we track, 0 are rated as either Strong or Improving while 91 are regarded as Weak or Deteriorating. The previous week’s totals were 0-91. The following are the strongest and weakest groups for the period ending 3/19/20. Strongest: Semiconductor’s & Related, Internet-Retail, Telephone Systems and Precious Metals. Weakest: Oilfield-Equipment, Oil-Secondary, Oilfield-Drilling and Airlines. To review all of the Industry Group Rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 3/26/20 were: Sector-Industrials (+20.92%), Blend-Small Cap (+19.84%), Sector-Alternative Energy (+18.80%), Sector-Financial (+18.53%), and Sector-Real Estate (+17.72%). The weakest categories were: Shorts (-29.51%). To review all the categories in the Market Edge universe, click on the ETFs tab.
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | 1 | 1 | Positive | ||||||
| Momentum Index: | -2 | -4 | Neutral | ||||||
| Sentiment Index: | 7 | 7 | Positive | ||||||
| Strength Index – DJIA (DIA): | 26.7 | 10.0 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 18.4 | 9.2 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 22.7 | 10.3 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 21636.78 | 19173.98 | 12.8% | ||||||
| S&P 500 Index: | , | 2541.47 | 2304.92 | 10.3% | |||||
| NASDAQ Composite Index: | 7502.38 | 6879.52 | 9.1% | ||||||
Ask Mr. Seifert
What Is VIX And How Is It Calculated?
In the past few weeks, the VIX has been one of the hottest topics in the markets. So, what is it? The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock markets expectation of volatility implied by the S&P 500 index options. It is calculated and published by the Chicago Board Options Exchange (CBOE). It is colloquially referred to as the fear index or the fear gauge. The current VIX concept formulates the theoretical expectation of stock market volatility. It is the expected annualized change in the S&P 500 index over the next 30 days, as computed from options-based theory and current options-market data.
There must be a buyer for every seller and this is the area that generally confuses the uninformed. A buyer of a call must find a seller of a call and vice versa with puts. So, the number of buyers and sellers is always stable. However, the VIX is computed as a ratio of calls to puts. In a bullish market the call buyers outnumber the put sellers and the VIX will move to the low side of the market (20+/- a few points). When the put buyers dominate the market the VIX will rally. On February 4, 2018 the VIX hit an all-time panic level high as the put buyers paid any price and the call sellers headed for the woods. The result was a 400% rise of the VIX in one day. Since that bottom, VIX calmed down and volatility returned to normal levels. The latest market crash, due to the China virus saw VIX soar to new levels as panic once again seized the market.
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