DJIA & S&P 500 Down – NASDAQ Up
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Investors continued to fret over increasing coronavirus cases and a lack of progress on a stimulus package to shore up the economy and extend unemployment benefits this week. US equities followed global markets sharply lower on Monday as several countries debated closing certain public facilities to curtail the spread of covid-19. The DJIA tumbled 924-points (-3.3%) at the open with reopening stocks some of the biggest losers. The losses were cut in half by the close, but the Dow finished below its 50-day moving average for the first time since April. The major averages were back on a roller coaster ride after that as investors weighed testimony before Congress from Fed Chair Jerome Powell, who called for another stimulus package, with mostly better than expected economic data. August Housing numbers showed a sharp increase as low mortgage rates sent home sales to a 14-year high. Selling midweek sent the small cap Russell 2000 below its 200-day moving average, but the market was able to find firmer footing going into the weekend. Technology (XLK), Utilities (XLU) and Consumer Discretionary (XLY) outperformed, bringing the market off its lows, while Energy (XLE) was the weakest sector down 8.73% on slowing economic growth concerns and weak demand. Materials (XLB) and Financials (XLF) lagged the broader market with both down more than -4.2%. Crude oil prices slid below $40 a barrel as the US Dollar (UUP) jumped to its highest mark since mid-July. Gold prices fell -5%, with the SPDR Gold ETF (GLD) down more than -10% from its August peak. The different indexes nudged higher for a second straight day on Friday but the Dow and S&P 500 finished lower for a fourth consecutive week. That is the longest weekly losing streak for the DJIA since August 2019. The NASDAQ was able to snap its three-week losing streak on a rebound in big cap tech shares after a +2.26% surge on Friday.
For the period, the DJIA dropped 483.46 points (-1.7%) and closed at 27173.96. The S&P 500 fell 21.09 points (-0.6%) and settled at 3298.46. The NASDAQ gained 120.28 points (+1.1%) to 10913.56, while the small cap Russell 2000 tumbled 61.87 points (-4.0%) and finished at 1474.91.
Market Outlook:The technical condition of the market was mixed last week as the major averages were able to bounce off key support levels before finishing mostly lower. The DJIA and S&P 500 were able to find support and bounce off their respective 100-day moving average possibly marking a bottom for this correction. The different index’s went into Friday oversold by several measures with the S&P Short Range Oscillator (SRO) at its lowest mark since the March selloff and stochastics falling into single digits. Despite Friday’s sharp gains the DJIA, S&P 500 and NASDAQ ran into resistance at their respective 50-day moving average (MA) and will need to close back above that level before we know a bottom could be in. The DJ Transportation Index and Philly Semiconductor Index however, are both now positioned above their 50-day moving average (MA), which bodes well for the market going forward. The small cap Russell 2000 however, underperformed offsetting some of the positive connotation of the strength in the transports and semi’s. Strength in the small caps will be needed before another leg up can be sustained. Another plus is that the Industrial (XLI) and Consumer Discretionary (XLY) sectors finished the period above the 50-day MA with Technology (XLK) perched on its 50-day MA. The technical indicators are negative and momentum, as measured by the 14-day RSI, is bearish to neutral.
Internal breadth was negative despite the market’s mixed finish. The NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, were at their lowest levels in a month and new 52-week lows outpaced the new highs during the week. The VIX however, managed to hold below 30 despite steep intraday selloffs, which is a positive, and may be signaling that traders believe the correction has run its course. Investor sentiment is neutral having been reigned in after four weeks of losses.
A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers.
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 +7, down a notch from the previous week. Cycles B, D and E are bullish, while Cycles A and C are bearish. The CTI is projected to stay positive during September.
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 Positive at +4, up a notch from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 2960 units while the number of new 52-week lows out did the new highs on three of the five days. Breadth was also negative at the NASDAQ as the A/D line dropped 3480 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 dropped to 20.8% vs. 47.6% the previous week, while those above their 200-day moving average fell to 43.9% vs. 50.7%. 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 9/23/20 shows outflows of $14.9 billion. Currently, the Sentiment Index is Neutral at +1, 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): | 7 | 8 | Positive | ||||||
| Momentum Index: | 4 | 3 | Positive | ||||||
| Sentiment Index: | 1 | 1 | Neutral | ||||||
| Strength Index – DJIA (DIA): | 17.2 | 44.8 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 24.5 | 41.0 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 18.1 | 40.5 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 27173.96 | 27657.42 | -1.7% | ||||||
| S&P 500 Index: | , | 3298.46 | 3319.47 | -0.6% | |||||
| NASDAQ Composite Index: | 10913.56 | 10793.28 | 1.1% | ||||||
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**Connotation is Positive or Negative Divergence from the DJIA |
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A Blow Off Bottom trade consist of a stock with a Market Edge Bullish Opinion, the purchase of a long, deferred ITM (in the money) call option and the sale of an expiring ATM – ATM -2 put spread. A good example of a Blow Off Bottom occurred on 09/21/20 when Goldman Sachs (GS) was an Optionomics, Blow Off Bottom selection. The stock had a bullish Market Edge Opinion and was trading at $188.37. The play was to sell the 187.5 – 185 expiring (09-25-20) put spread for $0.98 and buy the 187.5 deferred (10-02-20) call for $5.30, a total debit of $4.32. If right, the stock would go up, the put spread would expire worthless while the deferred call would jump in price setting up an unlimited profit situation. If the stock stayed the same or declined in value, the credit from the put spread would go out worthless which would lessen the loss of the deferred call. As it turned out, GS closed on 9/25/20 at $194.95 and the spread settled at $8.68, a gain of $4.36, a double. Had GS closed higher, the gain would have also been more. The opposite setup occurs for Blow Off Top selections.
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