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A Presidential Welcome

Market Letter (Weekly)

January 22, 2021
MARKET LETTER

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A Presidential Welcome
NASDAQ leads major averages to record highs after inauguration.

The major averages bounced back from last week's losses and punched new record highs across the board as investors celebrated the peaceful transfer of power to our 46th President of the United States this week. Equities opened the week higher on Tuesday as incoming Treasury-Secretary Janet Yellen urged lawmakers to 'act big' in providing more stimulus to counter the coronavirus. The market hit new all-time highs on Wednesday led by strength in Technology (XLK) and the FAANG stocks. General Motors (GM) and Microsoft (MSFT) also outperformed and hit new highs as the duo announced a $2 billion investment in General Motor's self-driving electric car venture Cruise. Strong manufacturing data on Thursday, coupled with a small dip in jobless claims left the different indexes little changed before weakness in International Business Machines (IBM) and Intel (INTC), despite beating earnings estimates on Friday stalled the week's rebound. The yield on the 10-year Treasury increased to +1.12% during the period before settling unchanged at +1.08%. Copper prices, a precursor of economic activity, finished the week close to an eight-year high, while the US Dollar gave back most of its gains over the last two weeks boosting commodities and foreign markets. The Ishares Emerging Markets ETF (EEM) recorded a new high on Thursday and is up almost 8% in January. The market sectors were mixed with Communication Services (XLC), Technology (XLK) and Consumer Discretionary (XLY) outperforming and posting new record highs, while Financials (XLF), Energy (XLE) and Materials (XLB) closed lower. Despite the different indexes finishing the period overbought by several measures, next week, tech heavyweights Apple (AAPL), Facebook (FB), Microsoft (MSFT) and Advanced Micro Devices (AMD) are set to release Q4 earnings and we could see the major averages notch record highs once again with tech stocks taking the lead. Also helping to boost equities will be more progress in distributing vaccines and ongoing stimulus talks as the Biden team takes the field.

For the period, the DJIA finished higher for a second straight week as it added 181.82 points (+0.6%) and closed at 30996.08. The S&P 500 picked up 73.22 points (+1.9%) and settled at 3841.47. The NASDAQ outperformed jumping 544.56 points (+4.2%) to 13543.06, while the small cap Russell 2000 finished higher for the 11th time in 12 weeks gaining 45.56 points (+2.1%) finishing at 2168.76.

Market Outlook:The technical condition of the market improved this week as the major averages muscled back into record territory. The technical indicators moved higher and are in bullish ground and Momentum, as measured by the 14-day RSI, is strong, but in some cases, overbought. The 14-day RSI was above 70 for the NASDAQ, Russell 2000, and Philadelphia Semiconductor Index which could lead to some consolidation. Some backing and filling to work off the overbought condition would be in order as since 11/01/20 the Russell 2000 is up +40.97%, the Philadelphia Semiconductor Index has surged +36.87% and the NASDAQ has gained +24.12%, compared to a +17.48% gain in the S&P 500. Furthermore, the S%P 500 is trading about 15% above its 200-day moving average (MA) which will take some selling to revert to its mean. Underlying market breadth remains bullish with new 52-week highs having expanded and new 52-week lows in the single-digits on both the NYSE and NASDAQ. The NYSE Advance/Decline line, a leading indicator of market direction, made a new high on Wednesday and the NASDAQ A/D line is also at a new recovery high. Investor sentiment, however, remains too bullish and complacent, with red flags waving. This week FINRA released Margin Debt as of the end of December and it increased +7.7% to another record high of $778,037 million. What is more concerning is that Margin Debt has jumped +18% since the end of October. Furthermore, the National Association of Active Investment managers (NAAIM) rose to 112.9 this week, its high-water mark going back to the week ending 12/13/2017. That means that even the professionals are carrying 12.9% of portfolio balances on margin. The good news is that despite that extreme level, the market didn't correct that year for another three weeks. Still, when indicators are at or, near extreme levels, some degree of caution needs to be practiced and perhaps decreasing your margin debt here would be a way of selling into market strength.

Investors gave a sigh of relief this week as the inauguration of Biden eliminated some of the uncertainty that had been hanging over the stock market. Biden's plans for increasing vaccines and rushing new stimulus into the economy has also firmed equities. The next two weeks bring the onslaught of Q4 earnings and so far, they are better than expected and CEO's are issuing strong forward guidance. With the major averages overextended, we are likely to see an increase in volatility here but, a move below 18-20 in the VIX would be a sign that traders are getting more comfortable with valuations and could trigger more upside. The Market Edge CTI is projected to remain Bullish for another week or two before changing to a Bearish market posture so more upside should be in the cards. Upside targets for this bullish cycle remain 32,135 for the DJIA, 3900 for the S&P 500 and 13,700 for the NASDAQ.

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 Positive at +3, down six notches from the previous week. Cycles A, C, D and E are bullish, while Cycle B is bearish. The CTI projects a Bullish market cycle for a few more weeks.

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 +9, up four notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 1153 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line gained 2488 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 fell to 80.1% vs. 81.9% the previous week, while those above their 200-day moving average eased to 89.9% vs. 90.1%. 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 1/20/21 shows inflows of $3.6 billion. Currently, the Sentiment Index is Negative at -3, up a notch 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 11/13/2020 (DJIA – 29479.81). 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 (74) What's Not (21). Of the 91 Industry Groups that we track, 76 are rated as either Strong or Improving while 15 are regarded as Weak or Deteriorating. The previous week's totals were 76-15. The following are the strongest and weakest groups for the period ending 1/14/21. Strongest: Semiconductor's & Related, Automobile Mfg., Coal and Deversified Mining. Weakest: Precious Metals, Electric Utilities, Gas Companies and Pollution Waste Management. To review all of the Industry Group rankings, click on the Industries tab. ETF Center: The top performing ETF categories for the week ending 1/21/21 were: Sector-Alternative Energy (+8.39%), Sector-Internet (+6.48%), Shorts (+5.57%), Sector-Technology (+4.57%) and Sector-Telecom (+3.41%). The weakest categories were: Sector-Energy (-2.53%), Sector-Financial (-1.44%) and Commodity-Agriculture (-0.72%). To review all of the ETF categories in the Market Edge universe, click on the ETF 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):     3   9   Positive
Momentum Index:     9   5   Positive
Sentiment Index:   -3   -4   Negative
Strength Index - DJIA (DIA):     41.4   41.4   Negative
Strength Index - NASDAQ 100 (QQQ):     42.7   47.9   Negative
Strength Index - S&P 100 (OEX):     40.9   45.2   Negative
             
Dow Jones Industrial Average (DJIA):   30996.08 30814.26   0.6%
S&P 500 Index: , 3841.47   3768.25   1.9%
NASDAQ Composite Index:   13543.06 12998.50   4.2%
                   
 **Connotation is Positive or Negative Divergence from the DJIA          
Momentum Index Components   Current Reading Prior Week Connotation
**Dow Jones Industrial Averages (DJIA):   30996.08 30814.26  
**DJ Transportation Average   12856.54 12946.28 Positive
**S&P 500 Index 3841.47 3768.25 Positive
**NYSE Composite Index 14951.84 14894.17 Positive
**NYSE Advance-Decline Line 503980 502827 Positive
**10 Day MA Advance-Decline Line 1.13 1.17 Positive
**NDX 100 Index 13366.40 12803.93 Positive
**NASDAQ Composite Index 13543.06 12998.50 Positive
**DJ Utilities Index 857.94 861.09 Negative
**Russell 2000     2168.76   2123.20 Positive
Trin (5 Day Average) 1.14 0.87 Neutral
NYSE Weekly New Highs-New Lows  673-34 649-27 Positive
Zweig Breadth Indicator 0.53 0.32 Neutral
McClellan Oscillator 25 27 Neutral
McClellan Summation Index 3904 3923 Positive
Unchanged Issue Index 0.03 0.02 Negative
                   
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index(5 Day Avg) 66.00 68.00 Neutral
Shares Sold Short NYSE - Monthly (000) 13574233 13810332  
NYSE Short Interest Ratio----(NYSE Only) 3.0 3.6 Bullish
Shares Sold Short NASDAQ  - Monthly (000) 9974931 9589607  
NASDAQ Short Interest Ratio 1.9 1.8 Bullish
AAII Bull-Bear Ratio 1.2 2.1 Neutral
Put/Call Ratio (5 Day Avg.- All Equity Options) 0.83 0.84 Bearish
Dividend Yield Spread 0.49 -0.45 Bullish
NAAIM Exposure Index 112.9 106.8 Bearish
Bullish Investment Advisors 60.4 63.7 Bearish
Bearish Investment Advisors 16.8 16.7 Bearish
Bullish - Bearish Investment Advisors Ratio 3.6 3.8 Bearish
VIX (CBOE Volatility Index) 21.91 24.34 Neutral

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Market Indicators

Market Posture Cyclical Trend Index
Bullish
3
As of: 11/13/2020
As of: 01/22/2020
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Second Opinion Performance

Second Opinion Status

3141

Current Opinions
As of: 01/22/2021

91%

Long Accuracy
As of: 01/22/2021

57%

Avoid Accuracy
As of: 01/22/2021
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Market Recap - 01/22/2021

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 13543.06 12.14 0.09% 5.08%
DJ UTILITIES 857.94 0.04 0% -0.77%
DJ TRANSPORT 12856.54 -42.52 -0.33% 2.79%
DJ INDUSTRIALS 30996.98 -179 -0.57% 1.27%
NYSE COMPOSITE 14951.84 -67.21 -0.45% 2.94%
S & P 100 INDEX 1764.21 -2.65 -0.15% 2.54%
RUSSELL 2000 2168.76 27.34 1.28% 9.81%
S&P 500 3841.47 -11.6 -0.3% 2.27%
CBOE MKT VOLATILITY 21.91 0.59 2.77% -3.69%
AMEX COMPOSITE 2500.31 -18.53 -0.74% 5.9%
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