Stocks Surge To Record Highs
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The major averages raced higher on strong earnings, raised guidance and mostly, better-than-expected economic data this week sending the DJIA, S&P 500 and NYSE to new record highs. According to Bank of America, 66% of the companies reporting earnings have beat estimates and profit margins, above +12.3%, are close to old highs. Shares of Tesla (TSLA), Anthem (ANTM), AutoNation (AN), Johnson & Johnson (JNJ), American Express (AXP) and others blew away earnings estimates helping to lift the major averages. There were casualties however, as disappointing reports from International Business Machines (IBM), Intel (INTC), Snap (SNAP), Proctor & Gamble (PG) and Las Vegas Sands (LVS) had investors dumping shares for the winners. Rates inched higher with the 10-year Treasury yield closing the period at 1.68%, its highest level since May. Despite the higher yields, REITs (XLRE) and Utilities (XLU) were two of the strongest sectors. Healthcare (XLV), Financials (XLF) and Consumer Discretionary (XLY) were also up more than +2%. Communication Services (XLC) was the only sector finishing in the red, on weakness in social media stocks. The sector was down for a second straight week as shares of Facebook (FB), Alphabet (GOOGL) and Twitter (TWTR) got hit on concerns of slower ad sales. Gains in railroads and trucking stocks, after Union Pacific (UNP) and JB Hunt Transport Services (JBHT) topped earnings estimates, gave a boost to Industrials and sent the DJ Transportation up +3.8% on the week. The transportation index has soared +12.8% in October. Crypto currency investors sent Bitcoin to a new high as the first ETF tied to Bitcoin (BITO) began trading for the first time on Tuesday. Despite mixed trading on Friday, the major averages ended the period higher for a third consecutive week with all the different indexes at or near new all-time highs.
For the period, the DJIA gained 382.26 points (+1.1%) and settled at 35677.02. The S&P 500 added 73.53 points (+1.6%) and closed at 4544.90. The NASDAQ picked up 192.86 points (+1.3%) to close at 15090.20, while the small cap Russell 2000 gained 25.62 points (+1.1%), finishing at 2291.27.
Market Outlook: The technical condition of the market improved this week as the S&P 500 rode a seven-day win streak into Friday and the DJIA, S&P 500 and NYSE posted new record highs. The technical indicators are in positive territory with short-term trend gauge MACD and Momentum, as measured by the 14-day RSI indicator being bullish and trending higher. The DJ Transportation Index was the biggest percentage mover this week and has led the market higher throughout October. The index is closing in on a new record high for the first time since May and achieving that would trigger a Dow Jones Theory ‘buy signal’ for the broader market. The small cap Russell 2000 closed the week near the top of its trading range and a move above 2320 would be a big plus for the market going forward. The small cap index has been confined to a trading range since February. Consumer Discretionary (XLY), Energy (XLE) and Financials (XLF) all hit record highs this week, with Industrials (XLI), Materials (XLB), Technology (XLK) and REITs (XLRE) a chip shot away from their own all-time marks. Only two sectors, Communication Services (XLC) and Healthcare (XLV) are left below resistance at their 50-day moving average (MA).
Internal breadth is supportive of higher prices as the NYSE Advance/Decline line, a leading indicator of market direction, hit several new highs this week. The NASDAQ A/D line was also up sharply showing strong accumulation in stocks. New 52-week highs expanded during the week also indicating broad participation in the rally. Investor Sentiment is once again pushing the boundary of being overly bullish as both retail and institutional investors are buying into the rally. According to the American Association of Individual Investors (AAII), 46.9% of investors are bullish on the market. That compares to just 25.5% of market participants being bullish two weeks ago, and above the 38% historical average. Hedge funds are also jumping on the bull wagon. The National Association of Active Investment Managers (NAAIM) spiked to being 98% invested in equities, up from only 55% invested three weeks ago helping to feed the market rally.
Investors were worried that supply chain issues, rising material costs and labor shortages could derail the rally as Q3 earnings rolled in, but so far, those problems seem to be limited to specific industries. A weaker than expected PPI last week has hinted to some analysts that inflationary pressures may have peaked and certainly the Federal Reserve is projecting that higher prices will be transitory. That, however, remains to be seen and will be addressed at the November FOMC Meeting when we should also get a timeline for the tapering of asset purchases. This week several committee members, including Fed Chair Jerome Powell, said they expected tapering to begin next month and be completed by mid-2022. Although it’s widely expected that the Federal Reserve will start to taper purchases, a finicky market could react with a brief dip, but I’d look for that dip to be aggressively bought. Next week 1/3 of the S&P 500 will be reporting earnings and if they continue to come in better-than-expected we should see the major averages once again post new record highs throughout the week. However, the Market Edge/S&P Short Range Oscillator (SRO) on Wednesday, recorded its most overbought condition since the first week of September and that led to some consolidation in prices going into the weekend. That could limit upside over the near-term as the different indexes churn around 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.
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 +3, down a notch from the previous week. Cycles A, C, D and E are bullish, while Cycle B is bearish. The CTI is projected to remain in a positive configuration into year-end.
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 Positive at +6, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 1437 units while the number of new 52-week highs exceeded the number of new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line added 783 units while the number of new highs out did the new lows on each day. Finally, the percentage of stocks above their 50-day moving average jumped to 62.1% vs. 53.8% the previous week, while those above their 200-day moving average increased to 61.8% vs. 60.7%. 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. The Sentiment Index is Negative at -1, down two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 10/20/21 shows inflows of $10.9 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 7/30/2021 (DJIA – 34935.47).
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