Stocks Plunge On Surging Covid-19
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Investors moved to the sidelines ahead of next week’s Presidential election amid the collapse for further stimulus, surging coronavirus cases and global restrictions and lockdowns to curb the spread of the virus. Although Q3 earnings and economic data were mostly better than expectations, the major averages tumbled on cloudy forward guidance and election uncertainty. The Dow Jones dropped 1815.62 points (-6.4%) over the first three sessions before a tepid bounce, but the different indexes traded lower again on Friday to close out the worst week for the market since March. Selling was across the boards with Consumer Discretionary (XLY), Industrials (XLI), Technology (XLK), Healthcare (XLV), Financial (XLF) and Energy (XLE) all down more than 6%. Crude oil prices slipped to a five-month low and gold prices remained under pressure trading back below $1900 an ounce. Treasury yields posted their biggest weekly gain since August as the 10-year T-Bill ended at +0.86% weighing on rate sensitive sectors. The selloff took the NASDAQ and the S&P 500 briefly into correction territory, down -10% from their high, while the DJIA ended the week back in the red for the year.
For the period, the DJIA lost 1833.97 points (-6.5%) and closed at 26501.60. The S&P 500 fell 195.43 points (-5.6%) and settled at 3269.96. The NASDAQ tumbled 636.69 points (-5.5%) to 10911.59, while the small cap Russell 2000 gave up 102.02 points (-6.2%) and finished at 1538.48.
Market Outlook:The technical condition of the market deteriorated last week as the major averages turned in their biggest losses since the March selloff. The technical indicators for the different indexes are firmly in negative ground and momentum, as measured by the 14-day RSI, is negative and below 40. MACD is negative and confirms the bearish short-term trend. Key moving average (MA) support levels came into play. The DJIA traded down to its 200-day MA at 26199 for the first time since July but found support. The next support level would be the 38.2% retracement of the move from the March low to the October high at 24979. The S&P 500 broke below its 100-day MA and next support is around 3120, which ties in the 200-day MA and the September low. The NASDAQ struggled to hold support at its 100-day MA at 10891 and if the September low comes into play, support would be 10520. The DJ Transportation Index and small cap Russell 2000, which had been showing positive divergence and outperforming, fell with the broader market but stayed above support at their respective 100-day MA. The market ended the week oversold however, with stochastics below 20 and the S&P Short Range Oscillator (SRO) at -5.85%, which could lead to a bounce to start the week.
Market breadth was also bearish as both the NYSE and NASDAQ had more 52-week lows than new highs on each day for the first time since April. The NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, continue to show stocks are under distribution. The NYSE A/D line last put in a new high more than three weeks ago. Investor sentiment slipped back into Neutral, but the Percentage of Bullish Advisors hit its highest mark since the first week of September. In addition, bearish advisors are hard to find and the Bull/Bear Ratio, the difference between Bullish and Bearish Advisors, is at 40.1. That’s also the highest reading since the first week of September and is a sign of a market top.
Investors hoping for a stimulus package to help the economy weather the coronavirus slow down were disappointed this week. With the uncertainty of next week’s election and looming lockdowns in Europe even the most bullish of market participants had reason to pause. However, with economic data and earnings improving, record low interest rates and hopes for a stimulus package sometime after the election, the major averages should be able to stay above their 200-day MA’s and settle with a 10% correction. That means that most of the selling is probably behind us. With that said, I’d remain cautious and wait to see the technical indicators begin to show some improvement and the VIX to slide back below 25 before moving back aggressively into the market.
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 -2, down a notch from the previous week. Cycles D and E are bullish, while Cycles A, B and C are bearish. The CTI is projected to remain in negative ground into.
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 negative at the NYSE as the Advance/Decline line lost 5708 units while the number of new 52-week lows out did the new highs on all five days. Breadth was also negative at the NASDAQ as the A/D line dropped 6067 units while the number of new lows beat the new highs on each session. Finally, the percentage of stocks above their 50-day moving average dropped to 35.9% vs. 62.7% the previous week, while those above their 200-day moving average fell to 51.2% vs. 66.2%. 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 10/28/20 shows outflows of $11 billion. Currently, the Sentiment Index is Neutral at +0, up a notch 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 10/30/2020 (DJIA – 28335.57).
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