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Central Banks Boost Global Markets

Market Letter (Weekly)

May 29, 2020
MARKET LETTER

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Central Banks Boost Global Markets
Major averages higher for second straight week.

Global markets were able to trade higher for a second straight week on hopes that a vaccine against the coronavirus would be developed soon and more Central Banks upped the ante on additional stimulus plans. Equities also got a boost from more states and countries reopening their economies. The major averages punched new recovery highs during the week after the European Central Bank proposed a $750 billion Euro stimulus package that would include issuing centralized bonds and Japan passed a $1 trillion stimulus bill. Despite the positive early momentum, the different indexes faltered ahead of the weekend after the White House announced Thursday afternoon that President Trump would be addressing China's National Security Law on Hong Kong on Friday. Although the different indexes traded lower before the President's comments, they were less harsh than expected and investors bought the dip leaving the market mixed. Investors continued to rotate out of big cap technology names during the week and into more 'risk on' stocks as casinos, airlines, cruise lines and small cap stocks all outperformed. The DJ Transportation Index surged +5.9% during the period. Banks and industrials also were strong after lagging the market since the March lows. Shares of Goldman Sachs (GS), JP Morgan Chase (JPM) and Citigroup (C) were all up about +9%, while the SPDR S&P Regional Bank ETF (KRE) rose +9.3%. Financials (XLF), Industrials (XLI), REITs (XLRE) and Utilities (XLU) outperformed the broader market, while Energy (XLE), Communication Services (XLC) and Technology (XLK) were the weakest sectors. The major averages were overbought heading into the weekend but the DJIA finished with its best weekly percentage gain in seven-weeks.

For the period, the DJIA traded higher for the third time in four weeks gaining 917.95 points (+3.8%) to 25383.11. The S&P 500 added 88.86 points (+3.0%) and finished at 3044.31. The NASDAQ picked up 165.28 points (+1.8%) and finished at 9489.87, while the small cap Russell 2000 jumped 38.51 points (+2.8%) to close at 1394.04.

Market Outlook:The technical condition of the market was little changed but remained bullish last week. The major averages were able to post new recovery highs before the rally ran out of steam ahead of the weekend. Several of the indexes were able to break through significant moving average (MA) resistance however, most notably the S&P 500, which joined the NASDAQ trading back above its 200-day MA. The DJIA and Russell 2000 were able to cross above their respective 100-day MA, but both came up well short of their 200-day MA. The technical indicators for the different indexes are bullish and momentum, as measured by the 14-day RSI, remains positive. Rotation out of overbought technology names weighed on the tech heavy NASDAQ, but for a second week, the DJ Transportation Index and small cap Russell 2000 were the benefactors of that rotation and outperformed the broader market. As mentioned last week, that bodes well for the market going forward and leadership by these groups could help steer the market to a V-shape recovery. Currently, almost half of the sectors are trading back above their 200-day MA, but as those sectors nudge closer to their previous highs momentum is slowing. That's to be expected as it's difficult to imagine any sector is in better shape now than before the pandemic scare. Technology (XLK), Communication Services (XLC), Healthcare (XLV) and Consumer Discretionary (XLY) are all back above their 200-day MA and Materials (XLB) joined that group on Friday. The exception of course is Biotech. The iShares NASDAQ Biotechnology ETF (IBB) is trading at an all-time high as biotech's race for a vaccine for Covid-19. Breadth remains positive and the NYSE Advance/Decline line, which is considered a leading indicator of market direction, is only about 7,000 units off its all-time high. New highs are still not up to par and we'll need to see expansion in those numbers. At this stage, except for a slowing in momentum from the leading groups, I'm not seeing any negative divergence that indicates that the market rally is ready to reverse course.

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 +11, up 10 notches from the previous week. The CTI was reset as of the week ending 4/03/20 after it appeared that the bottom for this cycle was 3/23/20. However, it wasn't clear whether or not there would be a retest of that bottom, which would have led to the cycles being extended, and the mid-range cycles being reset later in the year. With the recovery off the March low now exceeding +39.36% for the DJIA, the cycles have all been reset to start anew as of the week ending 4/03/20 indicating that a new bull market has begun. Cycles B, C, D and E are bullish, while Cycle C is Bearish. The CTI is projected to remain bullish into July.

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, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 3295 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 gained 1592 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 jumped to 89.4% vs. 81.1% the previous week, while those above their 200-day moving average rose to 32.5% vs. 26.8%. 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 5/27/20 shows outflows of $2.9 billion. Currently, the Sentiment Index is Neutral at +0, down two 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.

Industry Group Rankings : What's Hot (91) – What’s Not (0). Of the 91 Industry Groups that we track, 91 are rated as either Strong or Improving while 0 is regarded as Weak or Deteriorating. The previous week’s totals were 90-1. The following are the strongest and weakest groups for the period ending 5/28/20. Strongest: Casinos, Home Construction, Semiconductor's & Related and Other Recreation. Weakest: Savings & Loans, Water Utilities, Retail-Drug Based and Electric Utilities. To review all of the Industry Group Rankings, click on the Industries tab. ETF Center:The top performing ETF categories for the week ending 5/28/20 were: Sector-Financial (+8.90%), Sector-Industrial (+6.77%), Blend-Small Cap (+5.89%), Value-Small Cap (+5.70%) and Sector-Real Estate (+5.64%). The weakest categories were: Shorts (-5.99%), Bond-Government Long Term (-1.37%), Commodity-Energy (-1.37%), Commodity-Base Metals (-0.62%) and Commodity-Precious Metals (-0.52%). To review all the categories in the Market Edge universe, click on the ETFs tab.

Calendar of Technical Events:

***CALENDAR OF EVENTS***

**The above listed technical events occurred for the DIA on the date indicated. DIA is the ETF for the Dow Jones Industrial Average (DJIA).

Numbers To Watch:

***NUMBERS TO WATCH***

”Dr. Market Edge Says"
Dr. Market Edge has been involved in the stock market for over thirty years. He publishes informative articles every month that provide insight into the workings of the market and features of the Market Edge website. These articles are part of the Market Edge Education Institute located on the Market Edge ‘Home Page’. There are currently thirty-one articles ranging from how to interpret various chart formations to the proper placement of stop loss orders. Check them out today.

Market Timing Models   Current Reading Prior Week Connotation
Cyclical Trend Index (CTI):     11   1   Positive
Momentum Index:     3   2   Neutral
Sentiment Index:   0   2   Neutral
Strength Index - DJIA (DIA):     79.3   82.8   Positive
Strength Index - NASDAQ 100 (QQQ):     84.7   89.8   Positive
Strength Index - S&P 100 (OEX):     83.0   90.4   Positive
             
Dow Jones Industrial Average (DJIA):   25383.11 24465.16   3.8%
S&P 500 Index: , 3044.31   2955.45   3.0%
NASDAQ Composite Index:   9489.87 9324.59   1.8%
                   
 **Connotation is Positive or Negative Divergence from the DJIA          
Momentum Index Components   Current Reading Prior Week Connotation
**Dow Jones Industrial Averages (DJIA):   25383.11 24465.16  
**DJ Transportation Average   8969.79 8470.09 Negative
**S&P 500 Index 3044.31 2955.45 Negative
**NYSE Composite Index 11802.95 11331.97 Negative
**NYSE Advance-Decline Line 470054 464481 Positive
**10 Day MA Advance-Decline Line 1.70 0.99 Positive
**NDX 100 Index 9555.52 9413.99 Positive
**NASDAQ Composite Index 9489.87 9324.59 Positive
**DJ Utilities Index 806.92 763.93 Negative
**Russell 2000     1394.04   1355.53 Positive
Trin (5 Day Average) 1.48 1.26 Negative
NYSE Weekly New Highs-New Lows  90-24 73-130 Positive
Zweig Breadth Indicator 0.48 0.56 Neutral
McClellan Oscillator -140 -93 Positive
McClellan Summation Index 2322 1585 Positive
Unchanged Issue Index 0.02 0.03 Negative
                   
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index(5 Day Avg) 51.40 48.00 Neutral
Shares Sold Short NYSE - Monthly (000) 16430129 16148025  
NYSE Short Interest Ratio----(NYSE Only) 6.4 8.6 Bearish
Shares Sold Short NASDAQ  - Monthly (000) 9078274 8799364  
NASDAQ Short Interest Ratio 2.4 2.3 Bullish
AAII Bull-Bear Ratio 0.8 0.6 Bullish
Put/Call Ratio (5 Day Avg.- All Equity Options) 0.91 0.86 Bearish
Dividend Yield Spread 0.54 -0.48 Bullish
NAAIM Exposure Index 81.7 63.2 Neutral
Bullish Investment Advisors 50.5 49.0 Neutral
Bearish Investment Advisors 23.8 24.1 Neutral
Bullish - Bearish Investment Advisors Ratio 2.1 2.0 Neutral
VIX (CBOE Volatility Index) 27.51 28.16 Neutral

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Market Indicators

Market Posture Cyclical Trend Index
Bullish
+11
As of: 05/29/2020
As of: 05/29/2020
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Market Recap - 06/03/2020

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 9682.91 74.53 0.78% 7.91%
DJ UTILITIES 831.27 10.87 1.32% -5.45%
DJ TRANSPORT 9440.77 305.89 3.35% -13.4%
DJ INDUSTRIALS 26269.89 527.24 2.05% -7.95%
NYSE COMPOSITE 12302.19 255.78 2.12% -11.58%
S & P 100 INDEX 1418.33 14.91 1.06% -1.65%
RUSSELL 2000 1452.09 33.88 2.39% -12.28%
S&P 500 3122.87 42.05 1.36% -3.34%
CBOE MKT VOLATILITY 25.66 -1.18 -4.4% 86.21%
AMEX COMPOSITE 2025.2 35.61 1.79% -20.66%
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