Rising Covid-19 Cases Leave Market Mixed
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Most of the major averages soared to new record highs to start the week on news that Moderna’s (MRNA) Covid-19 vaccine showed 95% efficacy and could be available by year-end. Cyclical and reopening stocks led the advance on strong underlying breadth but left the stock market overbought. Spiking coronavirus cases had Wall Street tapping the brakes after that however, as investors worried that more restrictions and lockdowns, and a delay in further stimulus, could push the economy into a double-dip recession. The DJIA dropped 512.02 points (-1.7%) over the next two days and never recouped the loss. Mostly better than expected earnings from the likes of Target (TGT), EV maker Nio (NIO), Walmart (WMT) and others, coupled with strong housing and manufacturing data brought buyers in to buy the dips, but the sectors settled mixed. Energy (XLE), Industrials (XLI) and Materials (XLB) outperformed, while defensive sectors Utilities (XLU), Healthcare (XLV), Consumer Staples (XLP) and REITs (XLRE) finished in the red. Investors kept an eye on Congress hoping that a stimulus package would be forthcoming, but despite calls from the Federal Reserve that a relief package for small business was needed, elected officials failed to act. The DJIA, S&P 500, DJ Transportation Index and Russell 2000 all punched new record highs during the week but the different indexes closed the week mixed on concerns that the coronavirus would curtail economic activity going into the holidays.
For the period, the DJIA lost 216.33 points (-0.7%) and closed at 29263.48. The S&P 500 fell 27.61 points (-0.8%) and settled at 3557.54. The NASDAQ added 25.68 points (+0.2%) to 11854.97, while the small cap Russell 2000 jumped 41.30 points (+2.4%) and finished at 1785.34.
Market Outlook:The technical condition of the market showed minor deterioration as the major averages muddled in a narrow range after Monday’s spike. The technical indicators remain positive and momentum belongs to the bulls. The DJ Transportation Index and small cap Russell 2000 outperformed which is a positive going forward. Market technicians prefer to see these groups lead the broader market and both indexes hit multiple new highs during the period. In addition, the VIX continues to nudge lower showing traders are comfortable that a correction is unlikely at this time. However, the stock market remains overbought by most studies and that could lead to an increase in volatility over the near-term as the different indexes work off that condition.
Breadth also remains positive as new 52-week highs have increased, while the NYSE Advance/Decline line, a leading indicator of market direction, punched several record highs during the week.
As mentioned last week, investor sentiment remains too bullish and this contrarian indicator shows the bulls are too complacent. I mentioned last week that the American Association of Individual Investors (AAII) showed 55.8% of retail investors are bullish on the stock market. That total was reigned in this week but that was the highest mark since January 2018 after tax cuts. The DJIA hit a record high two-weeks later before dropping -10.4% two weeks after that. This week money managers are tipping the scale with the National Association of Active Investment Managers (NAAIM) showing institutional investors are invested 106.4%. That’s the highest exposure to the market since the last week of August before stocks sold off.
The stock market continues to climb the ‘Wall of Worry’ as it pushes further into record territory despite rising global Covid-19 infections. While some may point to a disconnect, the market is looking six-months ahead as it normally does. A vaccine appears to be on the way soon, and if widespread inoculation is successful, global markets will be awash with stimulus that could put economies on overdrive. That is why the market can defy the headlines and why pullbacks will be bought. Although stocks need to work off their overbought condition, look for the major averages to step higher into year-end.
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 Positive at +14, unchanged from the previous week. Cycles A, B, C, D and E are bullish. The CTI projects a Bullish market cycle into the first of the year.
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 +3, up three notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line jumped 2305 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 2153 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 81.8% vs. 76.2% the previous week, while those above their 200-day moving average rose to 83.8% vs. 77.6%. 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 11/18/20 shows inflows of $4.9 billion. Currently, the Sentiment Index is Negative at -4, 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 11/13/2020 (DJIA – 29479.81). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
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