Story

Stock Market Rally Heats Up

Market Letter (Weekly)

August 07, 2020
MARKET LETTER

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Stock Market Rally Heats Up
Small caps and transports lead equities higher.

The major averages powered higher this week with the NASDAQ and NASDAQ 100 hitting new all-time highs, while the S&P 500, DJ Transportation Index and small cap Russell 2000 traded at new recovery highs. Ongoing hopes that a vaccine for Covid-19 would be available by year's end, another trillion dollar stimulus package set to be completed possibly over the weekend, and for the most part, better than expected earnings and forward guidance kept investor sentiment positive. In addition, jobs data came in better than expected with the unemployment rate falling to 10.2% on Friday with new jobless claims the lowest since March. The market rally was broad based with every sector finishing in the plus column led by gains in Industrials (XLI), Financials (XLF), Energy (XLE), Communication Services (XLC) and Technology (XLK), all up more than 3%. Propped up by vaccine hopes and consumers ready to escape home quarters, the airlines, hotels and casinos were some of the best performing industry groups. Rate sensitive sectors got a boost from sinking yields and the 30-year mortgage hit a record low yield falling to 2.8%. Continued weakness in the US dollar gave a boost to commodities and crude oil prices as well as precious metals. Gold touched a record high after surging through the $2000 an ounce level, while silver jumped more than +20% for the period as investors kept an eye on heightened tensions between the US and China. Some rotation out of technology names and into cyclical stocks continued as economic data improved, but gains in big cap tech stocks showed investors were still looking for high growth. Despite Congress failing to pass a coronavirus relief package on Friday, the DJIA snapped a two week losing streak and turned in its best weekly percent gain since the first week of June, while the S&P 500 finished the period about 1% below its all-time closing high.

For the period, the DJIA rode strength in Apple Inc (AAPL) and Walt Disney (DIS) to a gain of 1005.16 points (+3.8%) and closed at 27433.48. The S&P 500 moved higher for a second straight week adding 80.16 points (+2.5%) and settled at 3351.28. The NASDAQ picked up 265.71 points (+2.5%) to 11010.98, while the small cap Russell 2000 jumped 88.75 points (+6.0%) and finished at 1569.18.

Market Outlook:The technical condition of the market improved this week as the different indexes traded higher each day. The technical indicators are bullish with momentum, as measured by the 14-day RSI, strong. The market did finish the period overbought however, with the S&P Short Range Oscillator (SRO) at +4.7%. The DJ Transportation Index and small cap Russell 2000 outperformed the broader market with both indexes up close to +6% on the week. Market technicians like to see these indexes lead the market. The Philadelphia Semiconductor Index (SOX) hit a record high this week after gaining +2.0%, with shares of NVIDIA (NVDA) and Advanced Micro Devices (AMD) leading the way. The market rally was supported by underlying strength in internal breadth as the NYSE Advance/Decline line, a leading indicator of market direction, hit several new highs and the NASDAQ A/D line hit new recovery highs showing more stocks participating in the rally. The number of stocks making new 52-week highs also continued to expand which is bullish.

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 +13, up 11 notches from the previous week. Cycles A, B, C, D and E are bullish. The CTI is projected to stay positive into 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 Positive at +7, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 3559 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 3616 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 69.2% vs. 65.5% the previous week, while those above their 200-day moving average increased to 51.1% vs. 48.1%. 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 8/06/20 shows outflows of -$7.2 billion. Currently, the Sentiment Index is Negative at -2, 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 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 (77) – What’s Not (14). Of the 91 Industry Groups that we track, 77 are rated as either Strong or Improving while 14 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 8/06/20. Strongest: Advertising, Internet-Retail, Casinos and Other Recreation. Weakest: Clothing & Fabrics, Savings & Loans, Gas Companies and Banks-Eastern. To review all of the Industry Group rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 8/06/20 were: Sector-Alternative Energy (+8.59%), Commodity-Precious Metals (+7.95%), Commodity-Energy (+6.44%), Blend-Small Cap (+5.79%) and Sector-Energy (+4.16%). The weakest categories were: Shorts (-4.63%) and Commodity-Agriculture (-0.30%). 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):     13   2   Positive
Momentum Index:     7   6   Positive
Sentiment Index:   -2   -2   Negative
Strength Index - DJIA (DIA):     17.2   48.3   Negative
Strength Index - NASDAQ 100 (QQQ):     22.4   36.7   Negative
Strength Index - S&P 100 (OEX):     27.7   56.4   Negative
             
Dow Jones Industrial Average (DJIA):   27433.48 26428.32   3.8%
S&P 500 Index: , 3351.28   3271.12   2.5%
NASDAQ Composite Index:   11010.98 10745.27   2.5%
                   
 **Connotation is Positive or Negative Divergence from the DJIA          
Momentum Index Components   Current Reading Prior Week Connotation
**Dow Jones Industrial Averages (DJIA):   27433.48 26428.32  
**DJ Transportation Average   10576.38 9994.81 Positive
**S&P 500 Index 3351.28 3271.12 Positive
**NYSE Composite Index 12765.84 12465.05 Negative
**NYSE Advance-Decline Line 483441 479882 Positive
**10 Day MA Advance-Decline Line 1.34 1.10 Positive
**NDX 100 Index 11139.39 10905.88 Positive
**NASDAQ Composite Index 11010.98 10745.27 Positive
**DJ Utilities Index 843.23 830.77 Negative
**Russell 2000     1569.18   1480.43 Positive
Trin (5 Day Average) 1.02 1.29 Neutral
NYSE Weekly New Highs-New Lows  257-31 240-20 Positive
Zweig Breadth Indicator 0.64 0.42 Positive
McClellan Oscillator -69 38 Neutral
McClellan Summation Index 3386 3172 Positive
Unchanged Issue Index 0.03 0.03 Negative
                   
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index(5 Day Avg) 68.80 63.20 Neutral
Shares Sold Short NYSE - Monthly (000) 15210053 15693475  
NYSE Short Interest Ratio----(NYSE Only) 7.4 9.0 Bullish
Shares Sold Short NASDAQ  - Monthly (000) 9219227 9506181  
NASDAQ Short Interest Ratio 1.9 1.9 Bullish
AAII Bull-Bear Ratio 0.5 0.4 Bullish
Put/Call Ratio (5 Day Avg.- All Equity Options) 0.78 0.83 Bearish
Dividend Yield Spread 0.78 -0.77 Bullish
NAAIM Exposure Index 94.5 97.4 Bearish
Bullish Investment Advisors 56.7 57.3 Bearish
Bearish Investment Advisors 17.3 17.5 Bearish
Bullish - Bearish Investment Advisors Ratio 3.3 3.3 Bearish
VIX (CBOE Volatility Index) 22.21 24.46 Neutral
Market Timing Models   Current Reading Prior Week Connotation
Cyclical Trend Index (CTI):     2   2   Positive
Momentum Index:     7   7   Positive
Sentiment Index:   -2   -2   Negative
Strength Index - DJIA (DIA):     79.3   62.1   Positive
Strength Index - NASDAQ 100 (QQQ):     62.2   51.0   Positive
Strength Index - S&P 100 (OEX):     75.5   61.7   Positive
             
Dow Jones Industrial Average (DJIA):   26469.89 26671.95   -0.8%
S&P 500 Index: , 3215.63   3224.73   -0.3%
NASDAQ Composite Index:   10363.18 10503.19   -1.3%
                   
 **Connotation is Positive or Negative Divergence from the DJIA          
Momentum Index Components   Current Reading Prior Week Connotation
**Dow Jones Industrial Averages (DJIA):   26469.89 26671.95  
**DJ Transportation Average   9730.12 9900.09 Positive
**S&P 500 Index 3215.63 3224.73 Positive
**NYSE Composite Index 12461.78 12402.74 Negative
**NYSE Advance-Decline Line 479140 478499 Positive
**10 Day MA Advance-Decline Line 1.21 1.19 Positive
**NDX 100 Index 10483.13 10645.22 Positive
**NASDAQ Composite Index 10363.18 10503.19 Positive
**DJ Utilities Index 825.74 828.60 Negative
**Russell 2000     1467.55   1473.32 Positive
Trin (5 Day Average) 1.04 1.15 Neutral
NYSE Weekly New Highs-New Lows  215-22 198-33 Positive
Zweig Breadth Indicator 0.35 0.55 Negative
McClellan Oscillator 16 -37 Neutral
McClellan Summation Index 3164 2987 Positive
Unchanged Issue Index 0.04 0.03 Negative
                   
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index(5 Day Avg) 65.20 59.80 Neutral
Shares Sold Short NYSE - Monthly (000) 15693475 15406582  
NYSE Short Interest Ratio----(NYSE Only) 9.0 7.9 Bullish
Shares Sold Short NASDAQ  - Monthly (000) 9506181 9033432  
NASDAQ Short Interest Ratio 1.9 1.9 Bullish
AAII Bull-Bear Ratio 0.6 0.7 Bullish
Put/Call Ratio (5 Day Avg.- All Equity Options) 0.84 0.83 Bearish
Dividend Yield Spread 0.67 -0.64 Bullish
NAAIM Exposure Index 97.9 90.5 Bearish
Bullish Investment Advisors 56.7 58.1 Bearish
Bearish Investment Advisors 17.3 18.1 Bearish
Bullish - Bearish Investment Advisors Ratio 3.3 3.2 Bearish
VIX (CBOE Volatility Index) 25.84 25.68 Neutral
                   

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Market Indicators

Market Posture Cyclical Trend Index
Bullish
+13
As of: 05/29/2020
As of: 08/07/2020
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Market Recap - 08/10/2020

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 10968.36 -42.62 -0.39% 22.24%
DJ UTILITIES 841.03 -2.2 -0.26% -4.33%
DJ TRANSPORT 10864.94 288.56 2.73% -0.33%
DJ INDUSTRIALS 27791.44 357.96 1.3% -2.61%
NYSE COMPOSITE 12844.02 78.18 0.61% -7.68%
S & P 100 INDEX 1550.69 2.79 0.18% 7.52%
RUSSELL 2000 1584.67 15.49 0.99% -4.27%
S&P 500 3360.47 9.19 0.27% 4.01%
CBOE MKT VOLATILITY 22.13 -0.08 -0.36% 60.59%
AMEX COMPOSITE 2168.21 30.9 1.45% -15.05%
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