Bulls Cheer Election Results
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A week after the worst weekly performance for the DJIA since March, the major averages turned it around and closed out their best week since April. Global markets also rallied despite facing increasing coronavirus cases and more restrictions and lockdowns. Fueling the rally was hopes of a stimulus package sooner than later, positive reports on a Covid-19 vaccine and a week of strong earnings. Investors also cheered the prospects of a split government in the US that would dampen any progressive changes to taxes and healthcare, keeping growth as the focus going forward. The FOMC Meeting ended with the committee leaving rates unchanged, as expected, but in the meeting announcement, Fed Chair Jerome Powell emphasized the need for more stimulus and said the Fed would continue to use every tool in its arsenal to prop up the economy. The market rally was broad based with every sector finishing sharply higher led by gains in Technology (XLK), Healthcare (XLV), materials (XLB), Communication Services (XLC) and Industrials (XLI), all up more than +7%. Gold prices also surged as interest rates fell back and the US Dollar weakened. The yield on the 10-year Treasury tipped .95% on the eve of the election but slipped as low as .75% before finishing at .81%. The Dow and S&P 500 were able to string together a four-day win streak and the NASDAQ a five-day run and closed about 2% off record highs as investors awaited the declaration of the winner in the election.
For the period, the DJIA jumped 1821.80 points (+6.9%) and closed at 28323.40. The S&P 500 returned 239.48 points (+7.3%) and settled at 3509.44. The NASDAQ surged 983.64 points (+9.0%) to 11895.23, while the small cap Russell 2000 added 105.68 points (+6.9%) and finished at 1644.16.
Market Outlook: The technical condition of the market improved last week as the major averages turned in their best weekly performance since April. In addition, the Philadelphia Semiconductor Index (SOX) punched a new all-time, while the small cap Russell 2000 was able to push to a new recovery high. The different indexes all climbed back above key resistance levels and ended the period back above their respective 50-day MA. Healthcare (XLV) and Materials (XLB) touched record highs during the week, while Consumer Discretionary (XLY), Communication Services (XLC) and Industrials (XLI) were all within 1% of a new high showing broad participation in the rally. The technical indicators reversed back into bullish ground and momentum, as measured by the 14-day RSI, is positive. The DJIA now faces resistance at a down sloping trend line at 28616 before making a run to another new high. The S&P 500 and NASDAQ look poised for a run to their old highs but are likely to experience some back and forth trading as the ‘sugar high’ from the election wears off. This week the VIX also fell sharply after hitting 40 during last week’s pullback. The VIX dropped below 25 on Friday as traders grew more comfortable with the election results.
Market breadth was bullish as both the NYSE and NASDAQ Advance/Decline lines moved sharply higher showing broad participation in the rally. The NYSE A/D line, a leading indicator of market direction, was closing in on a new high going into Friday. New 52-week highs expanded to their highest number since the first week of September. Last week’s selloff kept the Market Edge Sentiment Index in Neutral ground.
For now, the prospects of a split Congress seems to be what the market wanted. A ‘Blue Wave’ could have ushered in higher taxes and reallocated assets out of growth stocks and into value, which would have led to a much lower valuations in the market. Lower rates should also keep the US dollar weaker helping to boost Emerging Markets and gold prices. November begins the start of the best six-month period in the stock market and after some consolidation of this week’s gains, the market should be able to move higher to close out the year.
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, unchanged from the previous week. Cycles A, D and E are bullish, while Cycles B and C are bearish. This week’s reversal in the market after the election has most likely led to a reset of the CTI and last week’s selloff, may have been the bottom of this cycle even though the cycles were short. If the DJIA stays above the low of 26143.77 next week, the CTI will reset. An update on the CTI will appear in next week’s Market Letter.
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 -1, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line jumped 4912 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also positive at the NASDAQ as the A/D line added 4879 units while the number of new highs beat the new lows on each session. Finally, the percentage of stocks above their 50-day moving average jumped to 67.7% vs. 35.9% the previous week, while those above their 200-day moving average increased 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 11/04/20 shows outflows of $5.9 billion. Currently, the Sentiment Index is Neutral at +0, unchanged from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Neutral as of the week ending 11/06/2020 (DJIA – 28323.40). 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): | -2 | -2 | Negative | ||||||
| Momentum Index: | -1 | -2 | Neutral | ||||||
| Sentiment Index: | 0 | 0 | Neutral | ||||||
| Strength Index – DJIA (DIA): | 31.0 | 36.5 | Negative | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 31.6 | 39.0 | Negative | ||||||
| Strength Index – S&P 100 (OEX): | 38.3 | 41.2 | Negative | ||||||
| Dow Jones Industrial Average (DJIA): | 28323.40 | 26501.60 | 6.9% | ||||||
| S&P 500 Index: | , | 3509.44 | 3269.96 | 7.3% | |||||
| NASDAQ Composite Index: | 11895.23 | 10911.59 | 9.0% | ||||||
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