Wall Street Wobbles on Tax Scare
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A volatile week ended with the major averages trading mixed and little changed as investors balanced rising Covid-19 cases and a Biden capital gains tax with strong earnings and better than expected economic data. Coming off record highs from the previous week, the market struggled early as dire reports out of India and Brazil showed coronavirus cases were spiking in parts of the world. Despite solid Q1 earnings and upbeat guidance from Coca-Cola (KO), Harley-Davidson (HOG) and Proctor & Gamble (PG), the different indexes moved lower as reopening and travel stocks took a hit led down by selling in airlines, leisure and cruise lines. The Market was able to turn it around on Wednesday however, getting a boost from a report that the US would have more than 200 million people vaccinated by the end of the week. The major averages nearly erased the period’s two-day stumble and the DJ Transportation Index soared to a new record high on strength in railroads after Canadian National (CN) offered $325 a share for Kansas City Southern (KSU). The indexes were headed to new highs again on Thursday powered by another round of strong earnings from Chipotle Mexican Grill (CMG), Blackstone Group (BX) and AT&T (T) and a drop in Initial Jobless Claims to the lowest level since the start of the pandemic. However, stocks sank in the afternoon after President Biden announced plans to raise the capital gains tax to 43.4% for those making more than $1 million. The DJIA gave up all of Wednesday’s gains dropping 321.41 points (-0.94%) and only four Dow components finished in positive ground. The bulls were able to shake off the tax burden on Friday and stocks rallied into the close leaving the different indexes almost flat for the week. Interest rates inched lower helping stocks firm, while the US Dollar fell to its lowest level since the first of March. Commodities were on the rise and the CRB Commodity Index flirted with a new 52-week high as copper prices touched a nine-year high. Crypto currencies were under pressure with Bitcoin briefly falling below $50,000 after nearly touching $65,000 just a week ago. The sectors were mixed with REITs (XLRE), Healthcare (XLV) and Industrials (XLI) outperforming while Energy (XLE), Consumer Discretionary (XLY), Utilities (XLU) and Communication Services (XLC) lagged the broader market. Friday’s surge took the S&P 500 briefly back into record territory, but last hour selling saw the bellwether finish the period slightly lower snapping a four-week win streak. The DJIA and NASDAQ also saw their weekly win streaks come to an end.
For the period, the DJIA lost 157.18 points (-0.5%) and closed at 34043.49. The S&P 500 eased 5.30 points (-0.1%) and settled at 4180.17. The NASDAQ gave up 35.53 points (-0.3%) to close at 14016.81, while the small cap Russell 2000 traded higher for a second straight week adding 9.19 points (+0.4%) finishing at 2271.86.
<B>Market Outlook:</B>The technical condition of the market was mixed this week as the major averages were mostly lower, but new highs were made in the NYSE and DJ Transportation Index. The technical indicators were mostly positive but momentum, as measured by the 14-day RSI, remains bullish across the board. Support for the DJIA, S&P 500 and NASDAQ was found at their respective 13-day moving average (MA), while the small cap Russell 2000 was able to cross back above its 50-day MA. Positive divergence was seen in the outperformance of the DJ Transportation Index and Russell 2000 this week. The DJ Transportation Index closed higher for a 12th consecutive week and is riding its longest weekly win streak in 32 years! The Russell 2000, which has traded in a narrow range for most of the year, is seeing an increase in momentum and is approaching what would be a Bullish Point & Figure Chart Triple Top Breakout, which would be a big positive for the broader market. Leadership by the small caps and transportation stocks is a sign of a healthy bull market and points to further upside for the market. This week’s volatile trading helped the major averages work off some of their overbought condition but there are still areas of the market that remain overbought. Underlying breadth remains strong with the NYSE Advance/Decline line, a leading indicator of market direction, hitting another new high as the week ended. This shows most stocks remain under accumulation. In addition, new 52-week highs are at levels associated with a bullish trend. Breadth in the NASDAQ is also positive though not as strong as the NYSE, and new 52-week highs contracted somewhat during the week. Investor sentiment still shows an overabundance of Bullishness, but we may see a pullback in some of the indicators after recently reaching extreme levels.
Investors were able to shake off Biden’s tax proposal this week after an initial flurry of selling and shift the focus back to higher earnings and strong economic data. Friday’s rally caught some by surprise, me included, but a note from Goldman Sachs (GS) helped soothe investor jitters. According to Goldman Sachs, the last time capital-gains taxes were hiked, in 2013, the wealthiest households sold 1% of their equity assets. According to the Federal Reserve’s distributional financial account data, the top 1% held $17.79 trillion of equities and mutual funds in the fourth quarter of 2020 — so a 1% selling of stocks this time would be $178 billion. That’s not likely to disrupt the trend of this bull market and furthermore, a final tax increase reform would probably have to be significantly reduced before a split Congress would pass any type of increase. Next week Q1 earnings will continue to roll in and the major averages should be able to lean forward as they flirt with new record highs.
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.
<B>Cyclical Trend Index (CTI):</B> 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 +3, down three notches from the previous week. Cycles B and E are bullish, while Cycles A, C and D are bearish. The CTI is projected to remain in Bullish Territory into May.
<B>Momentum Index (MI):</B> 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, down two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 344 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 gained 250 units while the number of new highs beat the new lows on four days. Finally, the percentage of stocks above their 50-day moving average fell to 61.9% vs. 69.5% the previous week, while those above their 200-day moving average eased to 87.5% vs. 88.5%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
<B>Sentiment Index (SI):</B> 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 4/21/21 shows inflows of $1.6 billion. That marks 11 consecutive weeks of inflows. Currently, the Sentiment Index is Negative at -4, unchanged from the previous week.
<B>Market Posture:</B> 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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