Stocks Slide On Oil’s Collapse
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A collapse in crude oil prices shook up global markets to start the week as lack of demand, over supply and storage issues sent oil futures into negative territory for the first time in history. The DJIA tumbled 1223.61-points (-5.0%) over a two-day period before oil prices stabilized, and a rally in big cap technology stocks cut the losses in half. A report that Gilead Sciences (GILD) new drug to fight Covid-19 disappointed in its first trial on Thursday erased a 300-point Dow rally and the different indexes finished the day mixed. The major averages were able to regain some upside momentum ahead of the weekend, but it wasn’t enough to extend the market’s two-week win streak. Every sector except Energy (XLE) and Communication Services (XLC) ended the period in the red with REITs (XLRE), Utilities (XLU), Financials (XLF) and Consumer Staples (XLP) the biggest laggards, down more than -3%. Besides the rebound in oil prices as the week ended, gold was a bright spot and the Gold Miners ETF (GDX) outperformed soaring to a seven year high as traders remained nervous over the impact of the coronavirus. Investors headed into the weekend with their fingers crossed that the gradual reopening of some state economies wouldn’t lead to a second wave of coronavirus cases. The DJIA, S&P 500 and NASDAQ were all stalled at key resistance levels as the week ended, but the back and forth, volatile trading enabled the market to work off its overbought condition after having surged more than 25% off the March lows. That leaves the door open for more gains over the near term as long as we don’t see any surprises from Covid-19.
For the period, the DJIA snapped a two-week win streak sliding 467.22 points (-1.9%) and closed at 23775.27. The S&P 500 lost 37.82 points (-1.3%) to finish at 2836.74. The NASDAQ eased 15.62 points (-0.2%) and finished at 8634.52, while the small cap Russell 2000 outperformed and picked up 3.95 points (+0.3%) to close at 1233.05.
Market Outlook:The technical condition of the market was little changed during the period as the major averages remained in a trading range. The technical indicators eased back into neutral ground with the 14-day RSI showing momentum had slowed and MACD Histograms positive, but moving lower. As mentioned, the major averages closed the week struggling at resistance levels, but the NASDAQ was able to trade above its 50 and 200-day moving average (MA) before stalling at its 100-day MA, while the S&P 500 was able to nudge above its 50-day MA on Friday. The Dow was stuck below its 50-day MA, which also represents roughly a 50% retracement of the selloff. One positive note was the outperformance this week of the small cap Russell 2000. Small caps and transportation stocks have lagged the broader market and have been stuck in a narrow trading range since early April. Breadth was mixed this week with the NYSE and NASDAQ Advance/Decline lines little changed which still shows the gains are being led by a narrow groups of big cap stocks. Volume also continued to contract as the market tries to move higher, which shows investors are backing off chasing stocks higher. Lastly, volatility remains high, but has been drifting lower from its peak, closing Friday at its lowest mark since March 4. That should keep investors from being whipsawed in and out of equities as the market looks to find firmer footing. With Friday’s positive close, the different indexes will have a chance to take out additional resistance levels next week and that could spark some short covering from traders still expecting the market to retest march lows, keeping the bull rally going a little longer.
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 +3, unchanged from the previous week. The CTI was reset as of the week ending 4/03/20 after it appears that the bottom for this cycle was 3/23/20. Cycles B and D are bullish, while cycles A, C and E are Bearish. However, the CTI is projected to return to a negative count the week ending 5/08/20 and remain negative into August which still leaves open possible weakness in the market ahead.
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 -2, up a notch from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 844 units while the number of new 52-week lows out did the new highs on three of the five days. Breadth was positive at the NASDAQ as the A/D line added 300 units while the number of new highs beat the new lows on three days. Finally, the percentage of stocks above their 50-day moving average jumped to 27.3% vs. 20.4% the previous week, while those above their 200-day moving average rose to 17.1% vs. 15.9%. 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 4/22/20 shows inflows of $1.9 billion. Currently, the Sentiment Index is Positive at +4, unchanged 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 4/09/2020 (DJIA – 23719.37). 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): | 3 | 3 | Positive | ||||||
| Momentum Index: | -2 | -3 | Neutral | ||||||
| Sentiment Index: | 4 | 4 | Positive | ||||||
| Strength Index – DJIA (DIA): | 79.3 | 72.4 | Positive | ||||||
| Strength Index – NASDAQ 100 (QQQ): | 70.4 | 53.1 | Positive | ||||||
| Strength Index – S&P 100 (OEX): | 75.8 | 69.5 | Positive | ||||||
| Dow Jones Industrial Average (DJIA): | 23775.27 | 24242.49 | -1.9% | ||||||
| S&P 500 Index: | , | 2836.74 | 2874.56 | -1.3% | |||||
| NASDAQ Composite Index: | 8634.52 | 8650.14 | -0.2% | ||||||
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