New Year Off to Mixed Start
The major averages finished little changed and mixed this week on back and forth volatile trading. Tax selling sent stocks lower to start the week, before investors piled back into equities on Thursday, the first day of trading in the New Year. The Dow soared 330.36 points (+1.16%) to 28868.80 on heavy trading. The DJIA, S&P 500 and NASDAQ closed at record highs, but an overnight killing of Iran’s top military commander sent stocks sharply lower on Friday. Crude oil prices surged on the news closing at $63.00 a barrel. Industrials (XLI), Energy (XLE) and Technology (XLK) ended up as the top performing sectors after Friday’s reversal, while Materials (XLB), Consumer Staples (XLP) and Healthcare (XLV) finished in the red. Investors were cautious as the week ended on reports that Iran could take retaliatory measures on US assets over the weekend but stocks ended the session off the lows of the day. For the period, the DJIA snapped a three-week win streak slipping 10.38 points (-0.0%) and settled at 28634.88. The S&P 500 ended its own string of five weekly gains as it gave up 5.17 points (-0.2%) ending at 3234.85. The NASDAQ outperformed adding 14.15 points (+0.2%) finishing at 9020.77, while the small cap Russell 2000 was down for a second straight week losing 8.16 points (-0.5%) and closed at 1660.87.
Market Outlook:The technical condition of the market was mixed as the week wrapped up, with most of the different indexes remaining overbought despite the back and forth trading. The technical indicators were bullish for the DJIA, S&P 500 and NASDAQ but negative divergence is present in the small cap Russell 2000 and DJ Transportation Index. MACD ST, a short-term trend measure, crossed into negative ground for the Russell 2000 during the week. Market technicians would like to see leadership by the transports and small caps and the underperformance of the indexes is a red flag for the broader market. Internal breadth is bullish with the NYSE Advance/Decline Line, a leading indicator of market direction, continuing to hit new highs. The NASDAQ A/D line hit its highest mark since October 1, 2018 but the numbers were barely positive. However, there is still broad participation in the market rally and indicates that if the market experiences near-term weakness it could be limited to a 5-6% move that alleviates the overbought condition of the market.
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 Negative at -1, unchanged from the previous week. The counts for Cycles C and D are bullish while the counts for Cycles A, B and E are bearish.
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, down two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 2128 units while the number of new 52-week highs out did the new lows on all four days. Breadth was also positive at the NASDAQ as the A/D line gained 225 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 eased to 72.5% vs. 74.8% the previous week, while those above their 200-day moving average rose to 71.7% vs. 71.5%. 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 1/01/20 shows outflows of $1.3 billion. Currently, the Sentiment Index is Negative at -4, up a notch from the previous week.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bearish as of the week ending 1/03/2020 (DJIA – 28634.88). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
Industry Group Rankings : What’s Hot (80) – What’s Not (11). Of the 91 Industry Groups that we track, 80 are rated as either Strong or Improving while 11 are regarded as Weak or Deteriorating. The previous week’s totals were 82-9. The following are the strongest and weakest groups for the period ending 1/02/20. Strongest: Advertising, Pharmaceuticals, Semiconductors & Related and Retail-Drug Based. Weakest: Home Construction, Building Materials, Household Products (Non-Durable) and Real Estate Investments. To review all of the Industry Group Rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 1/02/20 were: Sector-Alternative Energy (+2.47%), Sector-Internet (+2.44%, International-Emerging (+1.55%), Sector-Technology (+1.41%) and Commodity-Precious Metals (+1.18%). The weakest categories were: Commodity-Energy (-2.00%), Sector-Consumer Staples (-0.86%) and Shorts (-0.76%). To review all the categories in the Market Edge universe, click on the ETFs tab.
Calendar of Technical Events:
| Date | Event | Connotation | |
| 01/02/2020 | Price gap up | Bullish | |
| 01/02/2020 | Stock reached new 52 week high of 288.63 | Bullish | |
| 12/17/2019 | 10-day SMA cross above 21-day SMA | Bullish | |
| 12/16/2019 | MACD ST turned bullish | Bullish | |
| 12/12/2019 | Point & Figure Double Top breakout | Bullish | |
| 12/12/2019 | Up/Down slope turned up | Bullish | |
| 11/15/2019 | Relative Strength turned bearish | Bearish | |
| 10/25/2019 | 21-day SMA slope turned up | Bullish | |
| 10/25/2019 | MACD LT turned bullish | Bullish | |
| 10/11/2019 | 50-day SMA slope turned up | Bullish |
**The above listed technical events occurred for the DIA on the date indicated. DIA is the ETF for the Dow Jones Industrial Average (DJIA).
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Ask Mr. Seifert
What is the VIX Index and how is it calculated?
VIX is the ticker symbol for the CBOE’s volatility index. It shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. It is a widely used measure of market risk and is also referred to as the “investor fear gauge”.
The CBOE designed the VIX to create various volatility products. VIX was the first successful attempt at creating and implementing such an index. Introduced in 1993, it was originally a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, in 2004, it was expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors’ expectations of future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility because of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent times in the markets.
VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option’s expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.
While there is not a way to directly trade the VIX, the CBOE does offer VIX options, which have a value based on VIX futures and not the VIX itself. Additionally, there are 24 other volatility exchange-traded products (ETPs) for the VIX, bringing the total number to 25.
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