Choppy Week Ends Lower
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Another turbulent week left the major averages lower in choppy trading as cyclical stocks gathered sponsorship, while big cap technology shares continued to struggle. Equities kicked off the period with solid gains on Monday as a flurry of M&A activity and positive news on a Covid-19 vaccine sent the indexes sharply higher. The DJIA jumped 327.69 points (+1.18%) and the NASDAQ surged +1.87% on a broad-based rally that saw every sector post positive. Investors were whipsawed both higher and lower however, after that. Stocks initially rallied after the FOMC Meeting announcement on Wednesday afternoon left interest rates unchanged, but Fed Chair Powell’s dour outlook for the economy going forward reversed early optimism. The Dow surged 369-points after the Fed announccement, but the gains failed to stick by the close and the different indexes added to the losses on Thursday. The blue chips sank 384-points at the bell on Thursday before finishing marginally lower and snapping a four-day win streak. The S&P 500 traded down to its 50-day moving average (MA) and retested that support several times during the week, but was unable to hold the line on Friday. The NASDAQ fell into correction territory, down -10% from its recent high, and along with the NASDAQ 100 and Philly Semi Index, finished the period trading below its 50-day MA. Weak demand and a struggling US Dollar sent crude oil prices briefly below $40 a barrel but the commodity was able to rally back above that mark as the week ended. Copper, a leading indicator of economic activity, managed to punch a 36-month high on Thursday as demand in China increased as their economy strengthened. The major averages rolled over again on Friday and ticked lower for a third consecutive week.
For the period, the DJIA eased 8.22 points (-0.0%) and closed at 27657.42. The S&P 500 fell 21.50 points (-0.6%) and settled at 3319.47. The NASDAQ dropped 60.27 points (-0.6%) to 10793.28, while the small cap Russell 2000 outperformed adding 39.51 points (+2.6%) and finished at 1536.78.
Market Outlook: The technical condition of the market deteriorated last week as several indexes finally broke below support at their respective 50-day moving average (MA). After several successful tests of that support level, it gave way in Friday’s trade sending the different indexes sharply lower. The S&P 500, NASDAQ, NASDAQ 100 and Philly Semiconductor Index all closed below that mark. The DJIA, DJ Transportation Index and Russell 2000 outperformed and remained above that level. The technical indicators are in negative ground for the different indexes with MACD, which measures short term trends, in bearish ground and Momentum, as measured by the 14-day RSI, negative. The sectors were mixed as rotation into cyclical shares saw Energy (XLE), Industrials (XLI), Materials (XLB) and Healthcare (XLV) close the period in the plus column, while Communication Services (XLC), Consumer Staples (XLP), Consumer Discretionary (XLY) and Technology (XLK) finished in the red. Several of the leading sectors also dropped below their 50-day MA including Communication Services (XLC), Consumer Staples (XLP), Technology (XLK), and Consumer Discretionary (XLY). Despite weakness in the broader market, Industrials (XLI) and Materials (XLB) were able to punch new recovery highs during the week on rotation into cyclical sectors.
Internal breadth was mixed and may be trying to stabilize. After showing negative divergence and warning of a market top for several weeks, the NYSE and NASDAQ Advance/Decline lines were able to nudge higher in spite of the market’s losses. However the number of new 52-week highs continues to contract showing less stocks are leading the market. The NASDAQ registered 477 weekly new highs the first week of August and the NYSE 289. Last week the NASDAQ was down to only 131 stocks making new highs to 105 for the NYSE. The VIX had also been showing negative divergence while the stock market was rising to new highs but drifted lower this week possibly signaling that traders don’t see much more downside to the selloff. After three weeks of losses, frothy investor sentiment has returned to neutral.
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.
Presently the CTI is Positive at +8, down three notches from the previous week. Cycles A, B, D and E are bullish, while Cycle C is bearish. The CTI is projected to stay positive during September.
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 +3, down a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 1231 units while the number of new 52-week highs out did the new lows on all five days. Breadth was also positive at the NASDAQ as the A/D line added 2272 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 rose to 47.6% vs. 45.0% the previous week, while those above their 200-day moving average eased to 50.7% vs. 51.0%. 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 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 9/16/20 shows outflows of $2.8 billion. Currently, the Sentiment Index is Neutral at +1, up four notches from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 5/29/2020 (DJIA – 25383.11). 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): | 8 | 11 | Positive | |||||||||||||
| Momentum Index: | 3 | 4 | Neutral | |||||||||||||
| Sentiment Index: | 1 | -3 | Neutral | |||||||||||||
| Strength Index – DJIA (DIA): | 44.8 | 51.7 | Negative | |||||||||||||
| Strength Index – NASDAQ 100 (QQQ): | 41.0 | 46.9 | Negative | |||||||||||||
| Strength Index – S&P 100 (OEX): | 40.5 | 47.9 | Negative | |||||||||||||
| Dow Jones Industrial Average (DJIA): | 27657.42 | 27665.64 | 0.0% | |||||||||||||
| S&P 500 Index: | , | 3319.47 | 3340.97 | -0.6% | ||||||||||||
| NASDAQ Composite Index: | 10793.28 | 10853.55 | -0.6% | |||||||||||||
| **Connotation is Positive or Negative Divergence from the DJIA | ||||||||||||||||
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