Stocks Surge to Record Highs on Earnings

Market Letter (Weekly)

July 23, 2021


Stocks Surge to Record Highs on Earnings

Investors shake off rising virus concerns.

After a two-day 1024.98 point (-2.9%) drop in the Dow Jones on concerns the spreading Covid variant would slow down the global economic recovery, the major averages reset and surged higher to close out the week. The DJIA, S&P 500, NASDAQ and NASDAQ 100 were all back at new record highs at Friday's close as investor's focused on earnings and looked ahead to next week's earnings from the 'big guns' of technology. Microsoft (MSFT), Alphabet (GOOGL), Tesla (TSLA), Facebook (FB) and Apple (AAPL) are all scheduled to report Q2 earnings expected to blow out estimates. Economic data was mixed during the period with a soft jobs report on Thursday showing Initial Jobless Claims rising 51k, but rates were able to tick higher after touching their lowest return since February. The yield on the 30-year Treasury however, remained below 2% on Friday. Investors traded out of rate sensitive sectors Utilities (XLU), REITs (XLRE) and Consumer Staples (XLP), which finished the week mostly lower, and Energy (XLE) and rotated back into growth sectors. Communication Services (XLC), Consumer Discretionary (XLY), Technology (XLK) and Healthcare (XLV) outperformed, the latter on strength in biotech. The iShares NASDAQ Biotechnology ETF (IBB) jumped +3.8% during the week. Finally, a volatile week of trading in commodities saw the CRB Index finish at a new record high but crude oil prices were little changed from last week's $71.45 a barrel. Leaving the selloff in the dust, the major averages rode a four-day win streak into the weekend leaving the DJIA, S&P 500 and NASDAQ all sitting at new record highs and higher for the fourth time in the last five weeks.
For the period, the DJIA gained 373.70 points (+1.1%) and closed at 35061.55. The S&P 500 picked up 84.63 points (+2.0%) and settled at 4411.79. The NASDAQ jumped 409.75 points (+2.8%) to close at 14836.99, while the small cap Russell 2000 added 46.41 points (+2.1%) finishing at 2209.65.

Market Outlook: The technical condition of the market was mixed this week despite several indexes finishing at new highs. The technical indicators for the DJIA, S&P 500, NASDAQ and NASDAQ 100 were all back in positive ground with MACD, a short-term trend gauge, crossing into bullish territory and momentum, as measured by the 14-day RSI, gaining strength. The technical indicators for the secondary indexes however, remained in neutral ground. The small cap Russell 2000 and DJ Transportation Index saw some improvement during the period but remain in a downtrend and below key moving average resistance levels. The Philadelphia Semiconductor Index (SOX) surged +4.3% on the week, but the technical condition for the index also finished mixed. The Communication Services (XLC), Technology (XLK), Consumer Staples (XLP) and Healthcare (XLV) sectors all made new highs during the week, while the Consumer Discretionary (XLY) came up just short, which shows investors are buying growth and bodes well for the stock market going forward. Only the Energy (XLE) and Materials (XLB) sector ETFs are trading below their respective 50 and 100-day moving average (MA), while the Financial (XLF) ETF remains below its 50-day MA. 

Internal breadth improved during the week after showing negative divergence the last two weeks but finished with only marginal gains. The NYSE and NASDAQ Advance/Decline lines both showed positive accumulation, but new 52-week highs were anemic and showed some contraction. That indicates the rally leadership is again thin and fewer stocks are participating in the run. Investor sentiment moved out of the overly exuberant camp this week and the Market Edge Sentiment Index closed at a neutral 0. The two-day selloff saw both retail and hedge fund investors flip back from excessive bullishness to a more neutral stance. The American Association of Individual Investors (AAII) Sentiment Survey saw Bulls drop to 30.6%, the lowest number since the first week of October 2020, while the National Association of Active Investment Advisors (NAAIM) Exposure Index fell to 71 last week, down from 93.3 the previous week.  

Investors were jolted by a two-day selloff earlier in the week but didn't stay on the sidelines long. With the Federal Reserve keeping rates down and proclaiming the jobs market remains a way's off from their target goals and inflation transitory, investors have nowhere else to go. In addition, quarterly earnings are too tempting to pass on. According to Factset Research, blended Q2 earnings are expected to jump +69.3% YoY, and so far, 85% of companies reporting are surprising to the upside. Revenues are also topping forecasts, rising +20.2% YoY. Although forward guidance has been spotty, currently, analysts are expecting Q3 earnings to rise +24.2% YoY. However, don't get too complacent yet. The July FOMC Meeting gets underway on Tuesday and we'll get the Fed's announcement on rates and possible changes to the Federal Reserve's bond purchasing program on Wednesday. A policy change isn't expected, but if internal discussions on tapering become more pronounced, market participant's could decide to throw the first of their expected 'taper tantrums'!  

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. 

Currently, the CTI is Negative at -10, unchanged from the previous week. Cycles A, B, C, and D are bearish, while Cycle E is bearish. Monday's low was most likely the bottom for this cycle. However, in order to reset the cycles, the DJIA will need to hold above 33741.76 in the coming week. At that time, if the low is not violated, cycles A, B, C and D will be reset and the CTI and Market Posture will return to Bullish. 

Momentum Index (MI): The marketís 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 positive at the NYSE as the Advance/Decline line added 925 units while the number of new 52-week highs out did the new lows on four of the five sessions. Breadth was also positive at the NASDAQ as the A/D line gained 1561 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 rose to 37.3% vs. 36.9% the previous week, while those above their 200-day moving average fell to 73.1% vs. 75.7%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.

Sentiment Index (SI): Measuring the marketís Bullish or Bearish sentiment is important when attempting to determine the marketís 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 7/21/21 shows outflows of $8.8 billion. Currently, the Sentiment Index is Neutral at +0, up three notches from the previous week. 

Market Posture: Based on the status of the Market Edge, market timing models, the ëMarket Postureí is Bearish as of the week ending 6/18/2021 (DJIA ñ 33290.08). 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 (21) What's Not (70). Of the 91 Industry Groups that we track, 21 are rated as either Strong or Improving while 70 are regarded as Weak or Deteriorating. The previous week's totals were 22-69. The following are the strongest and weakest groups for the period ending 7/22/21. Strongest: Advertising, Semiconductor's & Related, Internet-Retail and Industrial Technology. Weakest: Metals-Non Ferrous, Trucking, Forest Products and Heavy Construction. To review all of the Industry Group rankings click on the Industries tab.

ETF Center: The top performing ETF categories for the week ending 7/22/21 were: Sector-Alternative Energy (+4.55%), Growth-Mid Cap (+2.79%), Growth-Small Cap (+2.25%), Blend-Small Cap (+2.21%) and Blend-Mid Cap (+1.99%). The weakest categories were: Sector-Healthcare (-7.16%), Sector-Technology (-3.49%), Shorts (-2.00%), Commodity-Base Metals (-0.71%) and Sector-Utilities (-0.41%).To review all of the ETF categories in the Market Edge universe, click on the ETF tab.

By David L. Blake, CMT


Market Timing Models   Current Reading Prior Week Connotation
Cyclical Trend Index (CTI):     -10   -10   Negative
Momentum Index:     -2   -3   Neutral
Sentiment Index:     0   -3   Neutral
Strength Index - DJIA (DIA):     48.3   51.7   Negative
Strength Index - NASDAQ 100 (QQQ):     50.5   64.6   Positive
Strength Index - S&P 100 (OEX):     46.2   46.2   Negative
Dow Jones Industrial Average (DJIA):   35061.55   34687.85   1.1%
S&P 500 Index:   4411.79   4327.16   2.0%
NASDAQ Composite Index:   14836.99   14427.24   2.8%

 *Connotation is Positive or Negative Divergence from the DJIA

Momentum Index Components     Current Reading Prior Week Connotation
*Dow Jones Industrial Averages (DJIA):   35061.55 34687.85    
*DJ Transportation Ave     14756.07 14491.91   Negative
*S&P 500 Index 4411.79 4327.16   Positive
*NYSE Composite Index 16552.38 16364.66   Negative
*NYSE Advance - Decline Line 523588 522665   Positive
*10 Day MA Advance - Decline Line 0.85 0.76   Negative
*NDX 100 Index 15111.79 14681.38   Positive
*NASDAQ Composite Index 14836.99 14427.24   Positive
*DJ Utilities Index 904.54 914.61   Negative
*Russell 2000     2209.65 2163.24   Negative
Trin - 5 Day Average 1.18 1.38   Neutral
NYSE Weekly New Highs - New Lows  382-94 380-90   Negative
Zweig Breadth Indicator 0.62 0.30   Positive
McClellan Oscillator 60 206   Neutral
McClellan Summation Index 1516 2198   Positive
Unchanged Issue Index 0.04 0.04   Negative
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index - 5 Day Average 22.20 35.00   Bullish
Shares Sold Short NYSE - Monthly (000) 13913298 13931754    
NYSE Short Interest Ratio - NYSE Only 3.3 3.4   Bullish
Shares Sold Short NASDAQ  - Monthly (000) 10993209 10901533    
NASDAQ Short Interest Ratio 2.3 2.4   Bullish
AAII Bull-Bear Ratio 1.0 1.4   Neutral
Put/Call Ratio - 5 Day Average All Equity Options 0.94 0.92   Bearish
Dividend Yield Spread 0.32 -0.25   Bullish
NAAIM Exposure Index 71.0 93.3   Neutral
Bullish Investment Advisors 53.1 61.2   Neutral
Bearish Investment Advisors 16.7 15.3   Bearish
Bullish - Bearish Investment Advisors Ratio 3.2 4.0   Bearish
VIX - CBOE Volatility Index 17.20 18.45   Neutral

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Market Posture Cyclical Trend Index
As of: 06/18/2021
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Market Recap - 07/23/2021

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 14836.99 152.39 1.04% 15.12%
DJ UTILITIES 904.54 11.56 1.29% 4.61%
DJ TRANSPORT 14756.07 101.43 0.69% 17.98%
DJ INDUSTRIALS 35061.55 238.2 0.68% 14.56%
NYSE COMPOSITE 16552.38 96.46 0.59% 13.96%
S & P 100 INDEX 2031.92 20.77 1.03% 18.1%
RUSSELL 2000 2209.65 10.17 0.46% 11.89%
S&P 500 4411.79 44.31 1.01% 17.46%
CBOE MKT VOLATILITY 17.2 -0.49 -2.77% -24.4%
AMEX COMPOSITE 2965.89 -4.45 -0.15% 25.63%
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