Spreading Covid-19 Sinks Stocks

Market Letter (Weekly)

April 03, 2020

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Spreading Covid-19 Sinks Stocks
Major averages head for retest of lows.

Global markets were whipsawed by Covid-19 headlines again this week as another volatile week saw the major averages spike both higher and lower. Hopes that a vaccine and quicker testing methods for the coronavirus on Monday kicked off the week on a positive note, but sellers emerged again on Tuesday as the US saw a big increase in the number of virus cases. Stocks sold off for a second day on Wednesday after President Trump warned that a "very, very painful two weeks" was in store on further spreading of the outbreak and the major averages tumbled another -4%. A 25% spike in crude oil prices after Saudi Arabia and Russia tried to end their price war by agreeing to production cuts led to a market rally that cut the week's loss in half on Thursday. However, dismal economic data and a much larger drop in payrolls on Friday, that pushed the unemployment rate up to +4.4%, led to another bout of selling that left the major averages negative for the week. The sectors were mixed as Energy (XLE) outperformed, with Consumer Staples (XLP) and Healthcare (XLV) also seeing gains. REITs (XLRE), Financials (XLF), Utilities (XLU) and Consumer Discretionary (XLY) were the weakest groups. Investors were reluctant to stay Long ahead of the weekend and the major averages suffered sharp losses again on Friday for an 11th consecutive week.

For the period, the DJIA posted a loss of 584.25 points (-2.7%) and closed at 21052.53. The S&P 500 lost 52.82 points (-2.1%) to finish at 2488.65. The NASDAQ tumbled 129.30 points (-1.7%) and finished at 7373.08, while the small cap Russell 2000 underperformed dropping 79.94 points (-7.1%) and closed at 1052.05.

Market Outlook:The technical condition of the market was little changed last week and remained weak. As noted last week, the bear market rally that we saw retraced 38.2% of the selloff before running out of steam. That was a 21.3% spike in the DJIA in three-days showing how fierce rallies can be in a Bear market. The technical indicators improved but also failed below the midpoint lines and were headed lower again on Friday. This week saw the DJ Transportation Index and small cap Russell 2000 continue to underperform the broader market which usually points to more weakness ahead. Friday's selloff now sets the market up for a retest of last week's lows. While I think we're probably in an extended trading range until we see a peak in the number of coronavirus cases, investors need to keep an eye on whether the previous lows are violated. That could lead to more selling and induce a fresh leg lower. If the major averages stay in a range, for the DJIA I'd look for support around 19,000 with resistance around 23500 and for the S&P 500, 2300 to 2700. The NASDAQ should trade between support around 6800 and 7940. Internal breadth remains weak and though we saw some signs of positive divergence that hinted at last week's rally, breadth deteriorated again this week pointing to more pain before we see another rally attempt.

Subscribers to Market Edge have an edge as to when to get back into the market in what looks like could be a historically opportune time to buy stocks. The best way to use Market Edge is to make a list of fundamentally, strong stocks that you like and put them in a Stock Watch list. Wait for the stock’s Opinion to be upgraded to Long or for it to become an Early-Entry Buy candidate. This will take the guesswork out of the buying process. The Market Edge Opinions contain several technical indicators which are weighted in such a way so as to produce the Power Rating (PR), a number that can vary between -55 to +100. Depending on the PR value, the Opinion will be either Long, Neutral or Avoid. One of the components of the Power Rating is our proprietary Up/Down Volume Slope (U/D Slope) which identifies conditions where by the smart or informed money is placing big bets, a good thing to know. Trying to catch a falling knife can be a disaster. Our approach will not get you in at the exact bottom but leaving 5% - 10% on the table is much better than getting clobbered AGAIN! At some point this madness will stop and a great buying opportunity will be at hand.

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 +1. The CTI will be reset once a bottom in the DJIA has been established. At that time, due to the severity of the selloff, the cycles will all be reset.

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, down a notch from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 3469 units while the number of new 52-week lows out did the new highs on all five days. Breadth was also negative at the NASDAQ as the A/D line fell 2734 units while the number of new lows beat the new highs on each day. Finally, the percentage of stocks above their 50-day moving average rose to 6.8% vs. 6.4% the previous week, while those above their 200-day moving average eased to 8.0% vs. 9.1%. 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 4/01/20 shows inflows of $3.9 billion. Currently, the Sentiment Index is Positive at +7, unchanged from the previous week.

Market Posture:Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Neutral as of the week ending 2/28/2020 (DJIA – 25409.36). 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 (2) – What’s Not (89). Of the 91 Industry Groups that we track, 2 are rated as either Strong or Improving while 89 are regarded as Weak or Deteriorating. The previous week’s totals were 0-91. The following are the strongest and weakest groups for the period ending 4/02/20. Strongest: Internet-Retail, Toys, Precious Metals and food Retailers. Weakest: Airlines, Oilfield-Equipment, Casinos and Other Recreation. To review all of the Industry Group Rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 4/02/20 were: Sector-Energy (+36.38%), Sector-Healthcare (+1.78%) and Shorts (+1.68%). The weakest categories were: Sector-Real Estate (-10.17%), Sector-Financials (-6.21%), Blend-Small Cap (-5.62%), Sector-Consumer Discretionary (-5.05%) and Sector-Industrial (-4.75%). To review all the categories in the Market Edge universe, click on the ETFs tab.

Calendar of Technical 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:


”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):     1   1   Positive
Momentum Index:     -3   -2   Neutral
Sentiment Index:   7   7   Positive
Strength Index - DJIA (DIA):     53.3   26.7   Positive
Strength Index - NASDAQ 100 (QQQ):     44.9   18.4   Negative
Strength Index - S&P 100 (OEX):     47.4   22.7   Negative
Dow Jones Industrial Average (DJIA):   21052.53 21636.78   -2.7%
S&P 500 Index: , 2488.65   2541.47   -2.1%
NASDAQ Composite Index:   7373.08 7502.38   -1.7%
 **Connotation is Positive or Negative Divergence from the DJIA          
Momentum Index Components   Current Reading Prior Week Connotation
**Dow Jones Industrial Averages (DJIA):   21052.53 21636.78  
**DJ Transportation Average   7305.31 7699.18 Negative
**S&P 500 Index 2488.65 2541.47 Positive
**NYSE Composite Index 9880.63 10187.21 Negative
**NYSE Advance-Decline Line 455913 459382 Negative
**10 Day MA Advance-Decline Line 0.99 0.97 Negative
**NDX 100 Index 7528.11 7588.37 Positive
**NASDAQ Composite Index 7373.08 7502.38 Positive
**DJ Utilities Index 706.01 758.93 Positive
**Russell 2000     1052.05   1131.99 Negative
Trin (5 Day Average) 0.92 1.03 Neutral
NYSE Weekly New Highs-New Lows  13-894 23-2360 Negative
Zweig Breadth Indicator 0.21 0.22 Negative
McClellan Oscillator 39 -112 Neutral
McClellan Summation Index -2169 -2422 Negative
Unchanged Issue Index 0.02 0.01 Negative
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index(5 Day Avg) 23.40 13.80 Bullish
Shares Sold Short NYSE - Monthly (000) 17884618 16564151  
NYSE Short Interest Ratio----(NYSE Only) 9.5 6.8 Bullish
Shares Sold Short NASDAQ  - Monthly (000) 9355907 9055609  
NASDAQ Short Interest Ratio 2.3 3.8 Bearish
AAII Bull-Bear Ratio 0.7 0.6 Bullish
Put/Call Ratio (5 Day Avg.- All Equity Options) 1.16 1.02 Neutral
Dividend Yield Spread 0.40 -0.61 Bullish
NAAIM Exposure Index 23.7 25.9 Neutral
Bullish Investment Advisors 31.4 30.1 Bullish
Bearish Investment Advisors 36.3 41.7 Neutral
Bullish - Bearish Investment Advisors Ratio 0.9 0.7 Bullish
VIX (CBOE Volatility Index) 46.80 65.54 Bullish

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Market Indicators

Market Posture Cyclical Trend Index
As of: 02/28/2020
As of: 02/28/2020
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Market Recap - 04/03/2020

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 7373.08 -114.2 -1.53% -17.82%
DJ UTILITIES 706.01 -23.35 -3.2% -19.69%
DJ TRANSPORT 7305.31 -140.4 -1.89% -32.98%
DJ INDUSTRIALS 21052.53 -360.9 -1.69% -26.23%
NYSE COMPOSITE 9880.63 -181.7 -1.81% -28.98%
S & P 100 INDEX 1151.57 -16.94 -1.45% -20.15%
RUSSELL 2000 1052.05 -33.76 -3.11% -36.44%
S&P 500 2488.65 -38.25 -1.51% -22.97%
CBOE MKT VOLATILITY 46.8 -4.11 -8.07% 239.62%
AMEX COMPOSITE 1520.31 -37.3 -2.39% -40.43%
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