Rally Stalls as Covid Cases Spike
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Volatility was on the rise this week as the Federal Reserve juiced equities with plans for another $1 trillion in stimulus that sent the NASDAQ and NASDAQ 100 to new record highs on Monday and Tuesday. The gains failed to stick however, as global markets plunged mid-week as a surge in Covid-19 cases threatened to derail the reopening of economies. Strength in big cap technology and the stay-at-home stocks was offset by weakness in travel, recreation and risk-on stocks keeping the major averages trading mixed for most of the week. The different indexes rolled over on Friday however, as several states tightened restrictions on reopening’s and the major averages traded sharply lower. Selling was broad based with every sector finishing red led down by weakness in Energy (XLE), Financials (XLF), Communication Services (XLC) and Industrials (XLI). Technology (XLK) outperformed with shares of Apple (AAPL), Amazon.com (AMZN), Microsoft (MSFT), NVIDIA (NVDA) and Lam Research (LRCX) all hitting new all-time highs on analysts raising price targets but succumbed to selling pressure as the week ended. Gold outperformed hitting an eight-year high during the period and crude oil prices briefly recaptured the $40 a barrel mark. Friday’s trade saw the S&P 500 finally break support at its 200-day moving average and the market’s momentum finished the period pointing lower with the major averages sliding for the second time in three weeks. That left the different indexes down for the month of June.
For the period, the DJIA lost 855.91 points (-3.3%) to close at 25015.55. The S&P 500 dropped 88.69 points (-2.9%) and finished at 3009.05. The NASDAQ outperformed but slid 188.90 points (-1.9%) and finished at 9757.22, while the small cap Russell 2000 tumbled 39.85 points (-2.8%) and settled at 1378.78.
Market Outlook:The technical condition of the market deteriorated last week in volatile trading that saw the major averages finish lower after the NASDAQ hit a record high. The technical indicators slipped into negative territory for most of the indexes. As mentioned last week MACD, which looks at the short-term trend, is in bearish ground for the stock market and momentum continues to weaken. This week, momentum in the market was neutral to negative and the 14-day RSI was showing negative divergence and did not confirm the NASDAQ’s record high. Another sign of weakness is the DJIA’s inability to trade above its 200-day moving average (MA). After briefly spiking above that resistance level in early June, the Dow has struggled just below that area and now looks headed for at least a retest of its 50-day MA at 24950. The S&P 500 tried to hold onto its 50-day MA but finally gave it up on Friday, which could lead to further weakness. Negative divergence is also showing in the market’s internal breadth. The NYSE and NASDAQ Advance/Decline lines, which are regarded as leading indicators of market direction, both topped out about three weeks ago. New 52-week highs also remain anemic, although the NASDAQ had shown some expansion early in the week. That shows a narrower group of stocks accounting for much of the market’s strength. Finally, I pointed out last week, the Market Edge Strength Indexes have been nudging lower for the last seven-weeks, and this week the DIA and QQQ Strength Indexes slipped into negative ground. That indicates that the Advance/Decline line rate of change continues to lose momentum, a negative factor. With the CTI projected to cross into Negative ground investors may want to be more cautious and avoid buying the dips for now.
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 +4, down a notch 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 A, C, D and E are bullish, while Cycle B is bearish. The CTI is projected to change to a negative reading within the next week or two which could change the Market Posture to 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 +0, down a notch from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 2692 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 fell 2276 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 dropped to 68.3% vs. 80.5% the previous week, while those above their 200-day moving eased to 33.0% vs. 35.8%. 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 6/24/20 shows outflows of $5 billion. Currently, the Sentiment Index is Neutral at +0, down a notch 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): | 4 | 5 | Positive | |||||||||||
| Momentum Index: | 0 | 1 | Neutral | |||||||||||
| Sentiment Index: | 0 | 1 | Neutral | |||||||||||
| Strength Index – DJIA (DIA): | 48.3 | 75.9 | Negative | |||||||||||
| Strength Index – NASDAQ 100 (QQQ): | 40.8 | 65.3 | Negative | |||||||||||
| Strength Index – S&P 100 (OEX): | 50.0 | 73.4 | Positive | |||||||||||
| Dow Jones Industrial Average (DJIA): | 25015.55 | 25871.46 | -3.3% | |||||||||||
| S&P 500 Index: | , | 3009.05 | 3097.74 | -2.9% | ||||||||||
| NASDAQ Composite Index: | 9757.22 | 9946.12 | -1.9% | |||||||||||
| **Connotation is Positive or Negative Divergence from the DJIA | ||||||||||||||
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