Stocks Surge For Second Week
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages were able to close mostly higher for a second straight week as investors balanced a leveling off of coronavirus cases, plans to reopen parts of the economy and mixed Q1 earnings. Like the previous week, big cap technology names led the advance with shares of Netflix (NFLX) and Amazon (AMZN) punching new 52-week highs. Healthcare and biotech stocks were also strong on better than expected earnings and a claim by Gilead Sciences (GILD) that its drug remdesivir showed patients with Covid-19 seeing rapid reduction in fever and respiratory symptoms. The iShares NASDAQ Biotechnology ETF (IBB) surged +9.4% on the week. The sectors were mixed during the week with Healthcare (XLV), Consumer Discretionary (XLY), Technology (XLK), Consumer Staples (XLP) and Communication Services (XLC)jumping more than +4%, while Financials (XLF), REITs (XLRE), Materials (XLB) and Utilities (XLU) struggled and finished down. Dismal economic data and another surge in New Jobless Claims left the different indexes mixed for most of the period, but a spike on Friday, following the President’s call to reopen parts of the economy, pushed the major averages into the plus column. With the major averages now around +25% off the closing low of 3/23/20, the market finished the week overbought and ripe for some profit taking as investors focus on Q1 earnings next week, and more importantly, forward guidance.
For the period, the DJIA added 523.12 points (+2.2%) and closed at 24242.49. The S&P 500 gained 84.74 points (+3.0%) to finish at 2874.56. The NASDAQ surged 496.56 points (+6.1%) and finished at 8650.14, while the small cap Russell 2000 bucked the trend losing 17.63 points (-1.4%) to close at 1229.10.
Market Outlook:The technical condition of the market improved during the period as the major averages extended their weekly win-streak to two. The technical indicators inched higher into bullish ground with Momentum, as measured by the 14-day RSI, solidly in positive territory. The NASDAQ, Philadelphia Semiconductor Index, and big cap NASDAQ 100 were the strongest indexes and closed the week back above their respective 50 and 200-day moving averages (MA). The S&P 500 crossed above its 50-day MA at the close on Friday. The NASDAQ 100 also finished the week up for the year, while the NASDAQ is only down -3.5% year-to-date. The DJ Transportation Index and small cap Russell 2000 however, showed negative divergence, and both finished lower for the week, which raises a red flag and could be a sign that the current rally may be getting close to topping out. The make-up of the market remains on firm footing with growth sectors Healthcare, Technology and Consumer Staples all trading back above their 50 and 200-day MA’s and Consumer Discretionary and Communication Services above their 50-day MA. Materials, Utilities and REITs ran into resistance at their 50-day MA. Industrials, Financials and Energy were still lagging the broader market by a wide margin. However, as the week ended it looked like there was some rotation out of the leading sectors into the beaten-up sectors. That could be an opportunity to put money to work at rock bottom prices on Industry Groups that have been trading sideways during the rally. Still, I don’t see any reason to buy banks or oil stocks unless you’re looking for a short-term trade. Breadth was also showing signs that the rally may be running out of steam. The NYSE and NASDAQ Advance/Decline lines were flat to down for the week and both were negative despite Thursday’s big gains in the NASDAQ. The NASDAQ Market Edge Strength Index also showed stocks under distribution despite the index’s move higher. Volume has also contracted as the market has moved up, which shows less sponsorship and negative divergence in the rally.
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 +3, unchanged from the previous week. The CTI was reset as of the week ending 4/03/20 after it appears that the bottom for this cycle was 3/23/20. Cycles A, B and D are bullish, while cycles C and E are Bearish. However, the CTI is projected to return to a negative count the week ending 5/01/20 and remain negative into August which still leaves open possible weakness in the market ahead.
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 -3, down three notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 668 units while the number of new 52-week highs out did the new lows on three of the five days. Breadth was barely positive at the NASDAQ as the A/D line fell 440 units while the number of new highs beat the new lows on two days. Finally, the percentage of stocks above their 50-day moving average jumped to 20.4% vs. 11.8% the previous week, while those above their 200-day moving average rose to 15.9% vs. 12.1%. 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 4/15/20 shows inflows of $5.0 billion. Currently, the Sentiment Index is Positive at +4, down two notches from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 4/09/2020 (DJIA – 23719.37). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
**Connotation is Positive or Negative Divergence from the DJIA |
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