Infrastructure Deal Drives S&P 500 to Record
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Stocks reversed the previous week’s shellacking as a parade of Federal Reserve Committee members and Secretary-Treasurer Janet Yellen reiterated that despite strong economic growth, interest rates would not move up until unemployment improved. Also providing fuel for a rally was a $1 trillion bipartisan infrastructure deal which was awaiting President Biden’s signature. The major averages sprinted out of the gates on Monday in a broad based rally that sent the DJIA up 586.89 points (+1.76%), its largest one-day point gain since March 1. Every component in the Dow Jones was green.
Testimony before Congress from Fed Chair Jerome Powell on Tuesday that inflation was transitory and that the economy remained a long ways from the committee’s goals helped lift the NASDAQ to a record high. Yields on the 10 and 30-year Treasury Bills eased to levels last seen in March, sliding to 1.47% and 2.10% respectively, before ending the period at 1.52% for the 10-year and 2.15% for the 30-year. Lower rates inflated growth and technology shares and the S&P 500 joined the NASDAQ and NASDAQ 100 at a new record high on Thursday. Gains in banking shares after passing their stress tests allowing the Money Center Banks to buy back shares and increase dividends sent stocks mostly higher again on Friday leaving the DJIA with its best performing week since early May.
Every sector posted positive led by a +6.66% spike in Energy (XLE), as crude oil prices nudged higher for a fifth consecutive week, and a +5.28% surge in Financials (XLF). Consumer Discretionary (XLY) and Industrials (XLI) also outperformed up more than +3% each. Utilities (XLU) was the laggard. The small cap Russell 2000 was the strongest index over the period, while the NASDAQ nearly finished higher each day before closing Friday with a slight loss. The week’s rally left the major averages at, or just below, new all-time highs.
For the period, the DJIA gained 1143.76 points (+3.4%) and closed at 34433.84. The S&P 500 added 114.26 points (+2.7%) and settled at 4280.71. The NASDAQ picked up 330.01 points (+2.4%) to close at 14360.39, while the small cap Russell 2000 outperformed jumping 96.64 points (+4.3%) finishing at 2334.39.
Market Outlook:The technical condition of the market improved this week as the major averages reversed the previous week’s losses sending the S&P 500, NASDAQ and NASDAQ 100 to new record highs. The technical indicators moved into positive ground for the different indexes with MACD, a short-term trend gauge, back in bullish ground and Momentum, as measured by the 14-day RSI, positive and moving higher. The major averages were able to rebound and trade back above their respective 50-day moving average (MA). The small cap Russell 2000 outperformed the broader market and has traded higher for five weeks in a row but remains below its record high. Leadership by the small caps is seen as a positive going forward. The DJ Transportation Index snapped a three-week losing streak but trades below its 50-day MA. While leadership by the transports is seen as a positive, the group has been hampered by rising fuel costs which has dented performance. The Philadelphia Semiconductor Index (SOX) showed relative strength and benefited from the pullback in yields. Three sectors were able to trade at new highs this week including Technology (XLK), Communication Services (XLC) and Healthcare (XLV). Internal breadth was bullish with the NYSE Advance/Decline, a leading indicator of market direction, close to a new high on Friday. The NASDAQ A/D line was also sharply higher showing most stocks are under accumulation. New 52-week highs expanded each day of the week which is bullish. While volume was somewhat lighter than usual this week, it was mainly due to a lack of declining volume as sellers of equities were hard to find. That goes along with investor sentiment remaining too bullish. This week the Percentage of Bearish Investment Advisors fell to 15.8%. That’s the smallest number since March 2018! The Bears have packed it in and that is a red flag that investors are too complacent.
Last week’s ‘taper tantrum’ by investors, spooked by what they perceived as a move by the Federal Reserve to begin tightening monetary policy, was shoved to the wayside this week. Buyers came back off the sidelines and, coupled with a proposed bipartisan infrastructure deal, several of the major averages were able to push to new highs. While the technical condition of the market reversed almost overnight, it shows how fragile the rally is due to the Federal Reserve’s accommodative positioning. As long as that remains in place however, it can keep a floor under equities as we look ahead to Q2 earnings.
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.
Currently, the CTI is Negative at -9, unchanged from the previous week. Cycles A and E are bullish, while Cycles B, C and D are bearish. The CTI is projected to remain in negative territory into July. At that time we will see a reset of the different cycles that should lead to a resumption of the bull market into the fall.
Momentum Index (MI): The markets 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 +1, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 3495 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line added 3923 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 rose to 54.8% vs. 52.2% the previous week, while those above their 200-day moving average increased to 83.5% vs. 83.3%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the markets Bullish or Bearish sentiment is important when attempting to determine the markets 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 6/23/21 shows inflows of $10 billion. Currently, the Sentiment Index is Negative at -3, unchanged from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bearish as of the week ending 6/18/2021 (DJIA ñ 33290.08). 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): | -9 | -9 | Negative | ||||||
| Momentum Index: | 1 | -1 | Neutral | ||||||
| Sentiment Index: | -3 | -3 | Negative | ||||||
| Strength Index – DJIA (DIA): | 17.2 | 27.6 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 44.8 | 36.5 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 22.6 | 33.3 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 34433.84 | 33290.08 | 3.4% | ||||||
| S&P 500 Index: | , | 4280.71 | 4166.45 | 2.7% | |||||
| NASDAQ Composite Index: | 14360.39 | 14030.38 | 2.4% | ||||||
Ask Mr. Seifert
Why is market psychology so important to success as a trader or investor?
Without a doubt the most important aspect of trading or investing isn’t numbers. Everyone has numbers. It is your emotional view of the market that is the key. I have been a trader and investor for over 40 years. I have taught scores of people how to trade and the one common trait that all successful traders and investors have is that they understand how the market works. It has never ceased to amaze me how little veteran traders or investors comprehend when I ask them how a trade takes place. How can you expect to beat the New England Patriots if you don’t know what defense they are in? It is incredible that most experienced traders believe that when the market is rallying it is because there are more “buyers than sellers”. They listen to the media and that is what they tell them is going on during a rally. When the market is breaking, they are told there are more “sellers than buyers”. So here is my first lesson on market psychology. The market is an auction where buyers and sellers bid and offer for a security or option. For every buyer there must be a seller. When they agree to exchange wealth it is called “price discovery”. The market is in equilibrium, even if it is only for a few seconds. So how does the market rally if the number of buyers and sellers are the same? The buyers are willing to pay more to get in. When they can’t find any sellers at the price they want they must “bid the market higher”, until they find where the sellers will exchange wealth. First lesson. Don’t listen to the media. They rarely have a clue!
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