Transports Lead S&P 500 to Record High
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Choppy trading left the major averages mixed this week with the DJIA riding a five-day win streak to a new record high, while the NASDAQ tumbled back to its 50-day moving average before trimming losses ahead of the weekend. The week kicked off on a mostly positive note as upbeat earnings from retailers Dillard’s (DDS), Macy’s (M) and Gap (GPS) helped send the DJIA up 238.38 points (+0.70%) on Monday, but investors shunned tech stocks leaving the NASDAQ with a small loss. Cautionary comments on inflation from Secretary-Treasurer Janet Yellen reignited fears of a Fed tightening on Tuesday and the NASDAQ gapped down on selling in big cap tech shares before finding support at its 50-day moving average (MA). The Technology sector ETF (XLK) nearly erased all the gains in April but also bounced off its 50-day MA. Reopening and leisure stocks helped the market firm on Wednesday after Caesars Entertainment (CZR) soared +7.8% on the day as the casino operator pointed to increasing sold out weekends at its Las Vegas properties. Also giving the different indexes a boost was better than expected earnings from General Motors (GM) which jumped more than +4%. The DJIA, NYSE and DJ Transportation Index punched all-time highs on Thursday as investors picked up beaten down stocks after Initial Jobless Claims hit a new pandemic low. A big miss in new jobs created on Friday brought buyers back into technology and growth shares, and short-term yields lower, as investors viewed the data as a deceleration in the US recovery. Dovish comments on the economy from Secretary-Treasurer Yellen midday helped boost the major averages further and the Dow and S&P 500 finished the week sitting at new record highs. The sectors were also split with Energy (XLE), Materials (XLB) and Financials (XLF) outperforming, while Utilities (XLU), REITs (XLRE) and Consumer Discretionary (XLY) the weakest market groups. The US Dollar fell to its lowest level since February giving commodities a boost and the CRB Commodities Index hit its highest mark since 2018, as copper prices touched a record high. The split market ended on a high note with the DJIA and S&P 500 at all-time highs, but the tech heavy NASDAQ down for a third consecutive week.
For the period, the DJIA snapped a two-week losing streak jumping 902.91 points (+2.7%) and closed at 34777.76. The S&P 500 added 51.43 point (+1.2%) and settled at 4232.60. The NASDAQ gave up 210.44 points (-1.5%) to close at 13752.24, while the small cap Russell 2000 picked up 5.18 points (+0.2%) finishing at 2271.63.
<B>Market Outlook:</B>The technical condition of the market was mixed this week despite record highs by the DJIA, S&P 500, NYSE and DJ Transportation Index, as the NASDAQ traded lower for a third consecutive week. The technical indicators for the DJIA and S&P 500 are in positive territory and Momentum, as measured by the 14-day RSI, is bullish, but the indexes are overbought by several measures. The S&P 500 closed on Friday trading 14.8% above its 200-day MA. The DJ Transportation Index is also overbought with the 14-day RSI at 78 after soaring 3.9%, and the index is trading 26.6% above its 200-day MA. The DJ Transportation Index was up for a 13th consecutive week, and according to the Wall Street Journal, that marks the index’s longest streak of weekly gains since a 15-week win streak that ended back in January 1899! The small cap Russell 2000 eked out a small gain after battling its 50-day MA during the week but continues to be turned back at its old record high of 2360 set in March. The Philadelphia Semiconductor Index (SOX) is also struggling, having tested support at its 100-day MA. The negative divergence by the NASDAQ and SOX are signs that the current rally may be getting to a point where we could see some profit taking in the broader market over the near-term. As mentioned last week however, although the weekly charts for the different indexes show a market that is the most overbought since January 2020, there is little to indicate that the current rally is ready to run out of steam yet. Breadth was also mixed during the period. While the NYSE Advance/Decline line, a leading indicator of market direction, made a new high, the NASDAQ A/D line was down. The split breadth is also apparent in the number of new 52-week highs. The NYSE saw expansion in new highs, but the NASDAQ saw expansion in the number of new 52-week lows. Another sign of negative divergence but the number of new highs on the NASDAQ remains a positive for the market. Investor sentiment is still too bullish but there was some let up by professionals as the National Association of Active Investment Advisors (NAAIM) Exposure Index fell from 103.7 the previous week to 87.8 this week showing some selling as they reduced margin exposure. Despite that, investors that are bearish on the market are hard to find.
Earnings season is beginning to wind down and the focus for investors will shift to whether recent economic data is showing a deceleration in the US recovery or a one-off. If that is the case, the debate between the doves at the Federal Reserve and those that are seeing runaway inflation can be pushed out until later in the year. Either way, it still looks like the stock market can tick higher if yields on the 10 and 30-year T-Bills stabilize and the US Dollar continues to struggle.
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 +1, down two 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 for only a few more weeks.
<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 from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 2946 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was mixed at the NASDAQ as the A/D line lost 2664 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 fell to 64.4% vs. 70.4% the previous week, while those above their 200-day moving average eased to 84.0% vs. 87.3%. 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 5/05/21 shows inflows of $4.8 billion. Currently, the Sentiment Index is Negative at -3, up a notch 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.
By David L. Blake, CMT
| Market Timing Models | Current Reading | Prior Week | Connotation | ||||||
| Cyclical Trend Index (CTI): | 1 | 3 | Positive | ||||||
| Momentum Index: | -1 | 1 | Neutral | ||||||
| Sentiment Index: | -3 | -4 | Negative | ||||||
| Strength Index – DJIA (DIA): | 65.5 | 69.0 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 57.3 | 59.4 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 58.1 | 62.4 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 34777.76 | 33874.85 | 2.7% | ||||||
| S&P 500 Index: | , | 4232.60 | 4181.17 | 1.2% | |||||
| NASDAQ Composite Index: | 13752.24 | 13962.68 | -1.5% | ||||||
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One thing should be noted. While a double is usually a good target for the directional trades, i.e. the Blow Offs and One Day Wonders, sometimes these positions can really take off. Case in point. The week ending 03/05/21 saw a Blow Off Top trade involving PYPL go from $6.83 to over $33.00, a $2600 gain as the stock fell from $271.14 to close at $239.05 on Friday. Such is life.
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