Earnings, Fed and Jobs Boost Stocks 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 melted up to new record highs this week fueled by strong earnings, a ‘patient’ Fed and a much better than expected jobs report on Friday. Also boosting equities was an antiviral pill from Pfizer (PFE) that was highly effective in treating the Covid Delta variant and promising to hasten the reopening of the US economy. Coming off a record setting week, stocks were cautiously higher to start the period as investors looked ahead to the FOMC announcement on monetary policy on Wednesday. As expected, the Federal Reserve dialed back asset purchases saying the economy was strong enough to stand on its own. In addition, Fed Chair Jerome Powell said that the Fed remained persistent that inflation would be transitory as supply chain issues abated, and that the Fed would remain patient in raising rates. The different indexes jumped on his comments, led by a +1.80% spike in the small cap Russell 2000, which broke out of a trading range that had been in place since February. The major averages gapped to all-time highs on Friday on the strong jobs report, but finished off the highs as the bull looked a little tired after five weeks of gains. The rally was broad based led by a +5.03% gain in the Consumer Discretionary (XLY) sector. Technology (XLK) Materials (XLB) and Consumer Staples (XLP) also outperformed. Only Healthcare (XLV) and Financials (XLF) finished in the red, the latter on a narrowing of the yield curve. The Fed’s dovish comment on rates led to yields slipping lower with the 30-year Treasury falling back below 2% and the 10-year T-bill rate sliding from 1.6% mid-week to 1.44% on Friday. Crude oil prices briefly fell back below $80 a barrel mid-week after OPEC and Russia agreed to gradually raise production, but spiked higher again on Friday on reopening prospects. Travel, Leisure and Entertainment stocks traded sharply higher on Friday after the Pfizer announcement with the US Global Jets ETF (JETS) soaring +6.39% on Friday alone. The major averages went into the weekend at new record highs booking a fifth consecutive weekly win streak with the S&P 500 closing at a new high for eighth day in a row and its 76th record high of the year. The NASDAQ closed Friday on a 10-day win streak, it’s longest run since an 11-day stretch in December 2019.
For the period, the DJIA added 508.39 points (+1.4%) and settled at 36327.95. The S&P 500 tacked on 92.15 points (+2.0%) and closed at 4697.53. The NASDAQ jumped 473.20 points (+3.1%) to close at 15971.59, while the small cap Russell 2000 outperformed surging 139.89 points (+6.1%), finishing at 2437.08.
Market Outlook: The technical condition of the market improved again this week as the major averages posted new record highs across the board. The technical indicators are in bullish ground and momentum, as measured by the 14-day RSI, remains strong. However, the different indexes are overbought by just about any measure. Stochastics are in the 90’s, the 14-day RSI is above 75 for the NASDAQ, the S&P 500 is trading 11% above its 200-day MA and the Market Edge/S&P Short Range Oscillator (SRO) ended the period at +3.85%. Historically the market tends to experience some weakness or sideways trading to alleviate the overbought condition when the technical indicators are at these levels. As noted over the last few weeks, the emergence in leadership from the Russell 2000 would give the broader market a fresh leg up if the index could break out of its trading range. The small cap index broke out on Wednesday and the near-term target of 2424 has been hit with 2460 up next. The DJ Transportation Index also outperformed this week, rising +5.9%, on top of a +13.8% jump in October, while the Philadelphia Semiconductor Index surged +8.8% in a parabolic move to an all-time high. Although leadership by these secondary indexes is a plus going forward, Friday’s move from an overbought condition looks more like an exhaustive gap that could point to lower prices over the near-term as gains are consolidated.
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 NASDAQ hitting the largest number since early March showing increasing participation in the rally. However, the rally has pushed bullish Investor Sentiment closer to extreme levels once again, which raises a red flag for market participants. The National Association of Active Investment Managers (NAAIM) Exposure Index came in at 108.0 this week which points to hedge funds increasing margin levels at their highest level since February. Furthermore, the Percentage of Bullish Investment Advisors nudged higher for a fourth consecutive week, though it remained a fraction below crossing into bearish territory. These readings become contrarian indicators at these levels and argue for a more cautious approach short-term.
Investors couldn’t have asked for better data this week on earnings, economic data and jobs, or, the Fed’s dovish remarks and patient stance on interest rates. The good news sent the major averages sharply higher and, in some cases, on a parabolic move higher. Although we’re in a seasonally strong period for equities, the gains over the last week look unsustainable on the charts, and bullish investor sentiment has gotten a little frothy. Friday’s gap up has the look of an exhaustive gap that generally leads to some backing and filling before the indexes can move higher. While I remain bullish on the market, there’s a good chance that we’ll get a better buying opportunity over the next few weeks before the market can rally once again into yearend.
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 +1, down two notches 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 +6, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 3590 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 4061 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 67.4% vs. 60.4% the previous week, while those above their 200-day moving average rose to 64.4% vs. 60.0%. 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 marketís 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 -2, down two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 11/03/21 shows inflows of $2.1 billion. That is a fifth consecutive week of positive money flow.
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).
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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