Major Averages Gain on Falling Yields
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A return to technology and growth stocks, as interest rates declined, helped the DJIA and S&P 500 snap a two-week losing streak as May came to a close. Led by a +2.32% spike in semiconductor stocks on Monday, the NASDAQ and Philadelphia Semiconductor Index traded back above their respective 50-day moving average (MA) and outperformed the broader market. The NASDAQ gained 190.18 points (+1.41%) and hit its highest level since May 10. The small cap Russell 2000 closed back above its 50 and 21-day MA’s on Wednesday’s run. As inflation fears ebbed, investors picked up beaten down FANG names and added to reopening and travel related shares with airlines, cruise lines, casinos and hotel stocks some of the best performing Industry Groups during the week. The yield on the 10-year Treasury note fell as low as 1.55% before settling at 1.58%, while the 30-year T-Bill touched 2.24% on Wednesday ending at 2.26%. Consumer Discretionary (XLY), Communication Services (XLC), REITs (XLRE), Industrials (XLI) and Technology (XLK) outperformed the broader market while Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) lagged and finished in the red. REITs and the Communication Services sectors hit record highs during the week, the latter on strength in Alphabet (GOOGL) and Facebook (FB), which also hit a new all-time high. Crude oil prices continue to tick higher touching their highest level since October 2018 and the commodity CRB Index jumped +2.44% on the week aided by a weaker US Dollar. The major averages nudged closer to the top of their trading range and record highs as the week ended, but the gains still left the NASDAQ marginally lower in May, its first losing month since October. The DJIA and S&P 500 extended their monthly win streak to four.
For the period, the DJIA tacked on 321.61 points (+0.9%) and closed at 34529.45. The S&P 500 added 48.25 points (+1.2%) and settled at 4204.11. The NASDAQ gained 277.75 points (+2.1%) to close at 13748.74, while the small cap Russell 2000 outperformed jumping 53.70 points (+2.4%) finishing at 2268.97.
Market Outlook: The technical condition of the market improved this week with the major averages all advancing and closing in on record highs. The technical indicators are in positive territory with MACD, a reliable trend gauge, in bullish ground for the different indexes and Momentum, as measured by the 14-day RSI, on the rise. Positive developments this week include the NASDAQ, NASDAQ 100, Russell 2000 and Philadelphia Semiconductor Index crossing back above their respective 50-day moving average (MA) and the outperformance by the small cap Russell 2000. The Philadelphia Semiconductor Index surged +4.4% on the week to lead the market higher. On the flip side, the rally in the Russell 2000 stalled at a descending trend line around 2800 which is also the top of its recent trading range and could mark a short-term top. In addition, we’ve seen a drop off in the number of Industry Groups that have a Strong or Improving technical rating by Market Edge. Four weeks ago, 59 of the 91 Industry Groups carried a positive ranking. That number slipped to only 32 this week which shows fewer groups are participating in the recent rally. Internal breadth improved with the NYSE Advance/Decline line, a leading indicator of market direction, hitting several new all-time highs showing the majority of stocks are still under accumulation. The number of new 52-week highs vs. new lows also expanded during the period. Investor sentiment continues to decline from frothy levels a few weeks ago, which is also a plus. Furthermore, this weeks data from Investor’s Intelligence shows an increase in the Percentage of Advisors expecting a market correction rising to 31.7%, its highest percentage since April 2020. This is viewed as a bullish contrarian indicator when it reaches extreme levels as it means advisors have been raising cash and will need to put those funds back to work. That was also seen in a rise in the National Association of Active Investment Managers (NAAIM) Exposure Index which saw a jump from 44.2 to 68.3, a bullish condition.
Despite what looks like a possible summer rally for the major averages, the summer is usually a weak period for stocks and June has had a poor track record for years. According to the Stock Trader’s Almanac, the week after June ‘Triple-Witching Options Day’ has been down on 24 of the last 29 years. Over that same period, the S&P 500 has only posted positive 55% of the time. Still, the major averages have been stuck in a trading range lately and look like they may be ready to take another stab at new highs before this run stalls, as market internals improve. At this stage, while the current rally is beginning to show signs of wear, it doesn’t appear like we’re due for any thing more than some backing and filling over the near term as we look for signs of negative divergence in the charts that could hint that the bull is due for a rest.
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 -5, down six units from the previous week. Cycle E is bullish, while Cycles A, B, C and D are bearish. The CTI is projected to remain in negative territory into July. At that time we will see a reset of the different cycles that should lead to a resumption of the bull market into the fall.
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, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2906 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 added 2707 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 jumped to 67.0% vs. 58.6% the previous week, while those above their 200-day moving average increased to 84.8% vs. 83.9%. 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 5/26/21 shows inflows of $8.2 billion. Currently, the Sentiment Index is Negative at -1, 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 5/28/2021 (DJIA – 34464). 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): | -5 | 1 | Negative | |||||||||
| Momentum Index: | -1 | -1 | Neutral | |||||||||
| Sentiment Index: | -1 | -1 | Negative | |||||||||
| Strength Index – DJIA (DIA): | 51.7 | 41.4 | Positive | |||||||||
| Strength Index – NASDAQ 100 (QQQ): | 26.0 | 29.2 | Negative | |||||||||
| Strength Index – S&P 100 (OEX): | 50.5 | 41.9 | Positive | |||||||||
| Dow Jones Industrial Average (DJIA): | 34529.45 | 34207.84 | 0.9% | |||||||||
| S&P 500 Index: | , | 4204.11 | 4155.86 | 1.2% | ||||||||
| NASDAQ Composite Index: | 13748.74 | 13470.99 | 2.1% | |||||||||
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I am asked this question all the time. You are sure that Goldman Sachs (GS) is going to report earnings/revenues and you feel that the stock is going to rally. You decide that the best leverage is to buy out of the out of the money calls. They are cheap, only $0.50 cents and you think you will at least double your money. Right? Wrong! First, there are no cheap out of the money puts and calls. They are priced off the current At The Money Straddle and all market participants are aware of their value. Remember that for every option trade there must be a buyer for every seller and vice versa. So, when you buy that $0.20 delta cheap call you must be right in two ways. The price must go in your direction and it must be greater than premium you paid for the option’s strike price. The number comes out and you were right GS rallies $15 but your $0.20 call actually goes down in value! You are shocked and blame everyone but yourself. Here is what you need to do. First learn how the option model works. Second use strategies that will protect you when your price direction is correct. I can assure you that it is not buying cheap calls. Stop playing a game that you can’t win and learn how to use options to enhance your winners, not take them away. I think that you will agree that nothing in trading or investing is more frustrating than being right in the market only to lose your money.
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