Tech Earnings Power NASDAQ 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).
Better-than-expected earnings landed the major averages at all-time highs this week, extending their weekly win streak to four. That is the best weekly stretch since April. Stocks mostly shook off supply chain issues and higher costs and investors rewarded the winners. Shares of Microsoft (MSFT), NVIDIA (NVDA), Tesla (TSLA), Alphabet (GOOGL) and Netflix (NFLX) all posted record highs, while Ford (F), Caterpillar (CAT), Merck (MRK) and others traded sharply higher on strong earnings and forward guidance. There were disappointments however, as Apple (AAPL), Amazon (AMZN), Twitter (TWTR), Robin Hood (HOOD) and others were slammed after coming up short. Growth sectors Consumer Discretionary (XLY), Technology (XLK), Healthcare (XLV) and Materials (XLB) outperformed, while Financials (XLF), Energy (XLE) and Utilities (XLU) lagged the broader market. Crude oil prices finished lower for the first time in 10-weeks, but remained above $80 a barrel. Economic data was mixed with Q3 GDP now estimated at +2%, below +2.7% consensus, and inflationary pricing pressures moderating as consumer spending slowed on higher prices. The yield curve narrowed on the data as the two-year Treasury rate rose above .50%, while longer term rates inched lower. The major averages nudged higher again on Friday to close out the week, and month, at new record highs and turned in their best monthly gain since November 2020.
For the period, the DJIA gained 142.54 points (+0.4%) and settled at 35819.56. The S&P 500 tacked on 60.48 points (+1.3%) and closed at 4605.38. The NASDAQ jumped 408.19 points (+2.7%) to close at 15498.39, while the small cap Russell 2000 picked up 5.92 points (+0.3%), finishing at 2297.19.
Market Outlook: The technical condition of the market improved this week as the DJIA, S&P 500, NYSE, NASDAQ and NASDAQ 100 all posted new record highs. The technical indicators are in bullish ground and momentum, as measured by the 14-day RSI, remains strong. The different indexes are overbought however, with stochastic readings in the 90’s, and the S&P 500 trading more than +9.1% above its 200-day moving average (MA). The tech heavy NASDAQ outperformed and closed the week on a five-day win streak. That could lead to some backing and filling over the next week as the indexes consolidate some of their October gains. The DJ Transportation Index and Philadelphia Semiconductor Index flirted with record highs this week but came up short. Nevertheless, the DJ Transportation Index has led the market rally in October surging +13.7%. The small cap Russell 2000 still lags the broader market and remains in a trading range that has been in place since February. A move above 2315-2320 would see the small cap index trade above a descending trend line and take a stab at its closing high of 2360 which would be a plus for the overall market. Finally, the October rally has been across the board as every sector was able to post gains for the month.
Underlying internal breadth remains bullish with the NYSE Advance/Decline line, a leading indicator of market direction, hitting several new highs during the period. New 52-week highs have also expanded with the number of new highs on the NYSE hitting the largest number since the first week of September. Investor Sentiment has returned to a more neutral position but is mixed. While retail investors are becoming less bullish, institutional investors have increased market exposure. The National Association of Active Investment Managers (NAAIM) Exposure Index came in at 103.4 this week which points to hedge funds going long on margin. That is their most exposure to equities since the last week of April.
Economic data this week showed growth was moderating and inflation pressures may be topping, but it is not likely to sway the Federal Reserve’s decision to announce a tapering of asset purchases at next week’s FOMC Meeting. Most analysts, as well as Fed Chair Jerome Powell, believe the economy is strong enough to weather a gradual tightening in monetary policy. If the major averages do selloff on a change in policy, expect buyers to come off the sidelines and buy the dip. According to LPL Financial Chief Market Strategist Ryan Detrick, since 1950 ñ and over the past 10 years ñ November has been the top month of the year for market returns.
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, unchanged from the previous week. Cycles C, D and E are bullish, while Cycles A and B are 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 +5, down a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 301 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 977 units while the number of new highs out did the new lows on four days. Finally, the percentage of stocks above their 50-day moving average fell to 60.4% vs. 62.1% the previous week, while those above their 200-day moving average eased to 60.0% vs. 61.8%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the market Bullish or Bearish sentiment is important when attempting to determine the markets 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 Neutral at +0, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 10/27/21 shows inflows of $15.1 billion. That is the biggest inflow to equities since mid-March.
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 ñ 34935.47).
Ask Mr. Seifert
How Is The % Probability Of Profit (POP) located on the ‘Trader’s Selections’ sheet calculated?
Answer: The % of Probability (POP) is the probability of a trade returning at least $0.01 at the time of expiration. This figure is derived from the 30-Day Implied Volatility for the stock based on the options activity for the specified strike price and expiration date. Depending on whether you are short a put or a call vertical credit spread, the trade will be profitable when the stock closes at expiration at least one cent above or below the breakeven price. For example, XYZ is trading at $100.00 per share. When you sell a 100.0 – 105.0 bearish, call spread for a $2.00 credit, the breakeven point is $102.00 ($100.00 plus $2.00). The trade’s POP is the probability that the underlying stock will close at least one cent below the $102.00 breakeven price. The larger the credit you receive when you sell a credit spread, the further away your breakeven price is, which should increase the trade’s Probability Of Profit.
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