Wild Week On Wall Street
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages rallied to start the week, building off the previous Friday’s spike, and the NASDAQ and NASDAQ 100 were able to settle at new all-time highs as investors cheered the reopening trade. New highs in big cap technology names Microsoft (MSFT), Apple (AAPL), NVIDIA (NVDA), Amazon (AMZN) and Tesla (TSLA) saw the NASDAQ close in record territory again on Tuesday and Wednesday before the bottom fell out on Thursday as new cases of the coronavirus saw an uptick and investors fretted over Fed Chair Jerome Powell’s gloomy forecast for the strength of a recovery. The market gapped lower and the DJIA, S&P 500, DJ Transportation Index and Russell 2000 all fell back below their respective 200-day moving average (MA). The selloff left every sector sharply lower with Energy (XLE), Financials (XLF), Industrials (XLI) and Materials (XLB) all down 8-10%. The DJIA dropped 1861.82-points (-6.9%) to 25128.17, its biggest one-day point loss since a 2997.10-point (-12.9%) tumble on 3/16/20. The S&P 500 sank -5.9% and Kroger (KR) was the only stock that scratched out a gain in the index. Another volatile session on Friday had the major averages spiking at the open only to reverse back near the breakeven line before pushing higher into the close. Despite Friday’s gains, the different indexes turned in their biggest weekly percentage loss since the week ending 3/20/20.
For the period, the DJIA snapped a three-week win streak dropping 1505.44 points (-5.6%) to 25605.54. The S&P 500 gave back 152.62 points (-4.8%) and finished at 3041.31. The NASDAQ lost 225.27 points (-2.3%) and finished at 9588.81, while the small cap Russell 2000 was the weakest index sinking 119.47 points (-7.9%) to close at 1387.68.
Market Outlook:The technical condition of the market deteriorated last week as the major averages worked off their overbought condition. The S&P Short Range Oscillator hit near record levels earlier in the week which historically has led to institutional selling in the market and stocks were overdue for some consolidation. The last time the major averages were this overbought was back in 2009 coming off the Financial Crisis Bear market bottom. The technical indicators slipped back into neutral ground with MACD, which measures the short-term trend, crossed into bearish ground for the different indexes during the week. Momentum, as measured by the 14-day RSI was in neutral ground. The DJ Transportation Index and small cap Russell 2000 led the market lower, which is a bearish connotation and struggled to hold support at their 100-day MA. In addition, looking at the charts of the different indexes shows a bearish Island Reversal pattern which usually marks a short term top and signals more weakness ahead. Friday’s rebound brought the S&P 500 back above its 200-day MA but not the DJIA and that could set the major averages up for a retest of some support levels before finding firmer footing. The DJIA has trendline support at 24300, followed by 24000, which represents a 38.2% retracement of the rally off the bottom and is close to the 50-day MA. The S&P 500 has support at 2900 and 2850 is the 38.2% retracement. Those levels are likely to see significant buyers come in. The NASDAQ has a gap to fill on its chart at 9000. These levels are also about -10% off the recovery highs, where one would expect a correction in a new Bull market to find support and rebound.
Breadth took a hit this week with the NYSE and NASDAQ Advance/Decline lines losing significant ground. On Thursday, the NYSE recorded only 92 stocks closing positive. While the NASDAQ was beginning to show some expansion in the number of new 52-week highs while it punched record highs, the numbers remain anemic and show that much of the recovery gains are from a narrow group of big cap technology names. Finally, despite this week’s tumble in the market, the major averages needed some backing and filling to digest some of the recent gains. The parabolic move off the bottom in the NASDAQ and NASDAQ 100 to new highs has been too high, too fast. Investors should be patient here and wait for an opportunity to enter new long positions and look for some sideways to lower trading.
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 +11, unchanged from the previous week. The CTI was reset as of the week ending 4/03/20 and the bottom for the cycles was 3/23/20 indicating that a new bull market began on that date. Cycles B, C, D and E are bullish, while Cycle A is bearish. The CTI is projected to remain bullish into July.
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, down a notch from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 4036 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also mixed at the NASDAQ as the A/D line dropped 3226 units while the number of new highs beat the new lows on each day. Finally, the percentage of stocks above their 50-day moving average fell to 77.2% vs. 90.3% the previous week, while those above their 200-day moving slid rose to 28.6% vs. 38.5%. 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 6/10/20 shows inflows of $20.4 billion. Currently, the Sentiment Index is Negative at -2, unchanged 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 5/29/2020 (DJIA – 25383.11). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||||
| Cyclical Trend Index (CTI): | 11 | 11 | Positive | ||||||||
| Momentum Index: | 2 | 3 | Neutral | ||||||||
| Sentiment Index: | -2 | -2 | Negative | ||||||||
| Strength Index – DJIA (DIA): | 86.2 | 79.3 | Positive | ||||||||
| Strength Index – NASDAQ 100 (QQQ): | 81.6 | 83.7 | Positive | ||||||||
| Strength Index – S&P 100 (OEX): | 77.7 | 81.9 | Positive | ||||||||
| Dow Jones Industrial Average (DJIA): | 25605.54 | 27110.98 | -5.6% | ||||||||
| S&P 500 Index: | , | 3041.31 | 3193.93 | -4.8% | |||||||
| NASDAQ Composite Index: | 9588.81 | 9814.08 | -2.3% | ||||||||
| **Connotation is Positive or Negative Divergence from the DJIA | |||||||||||
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