A Long Hot Summer
June 01, 2019
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A Long Hot Summer
Prolonged trade war could bolster bears.
MARKET REVIEW – JUNE 2019
Stocks were weighed down by unresolved trade issues during May as China and the U.S ratcheted up trade tariffs. The DJIA dropped 627.81 points (-2.3%) the first few days of the month as dovish comments from the Federal Reserve on interest rates were trumped by slowing global growth concerns out China and Europe. The prospects of slumping growth sent yields lower and the 3-month/10-year T-Bill yield curve inverted. The yield on the 10-year Treasury finished May at 2.13%, an eight-month low. President Trump’s threat to increase tariffs on China if a trade deal wasn’t reached rattled investors and stocks took another sharp leg lower mid-month after China retaliated with tariffs on U.S. goods. Trade headlines whipped the major averages higher and lower as traders hoped for progress on trade but the different indexes stepped lower again to finish the month on dimming hopes. The Dow lugged a six-week losing streak into June on weakness in multinationals. Investors rotated out of companies with more than 50% exposure to China into more defensive sectors but only rate sensitive REITs (XLRE) posted positive. While Q1 earnings mostly beat lowered estimates, upside surprises were met with a lukewarm response, while companies that missed expectations were punished. Steep losses in Energy (XLE- -11.10%), Technology (XLK- -8.66%), Materials (XLB- -8.18%), Industrials (XLI- -7.64%) and Consumer Discretionary (XLY- -7.60%) led the market down. Dow components 3M (MMM), Intel (INTC) and Dow Chemical (DWDP) all lost more than -20% in May leading the DJIA to a loss of 1777.86 points (-6.69%), settling at 24815.04. The S&P 500 gave up 193.77 points (-6.58%) to close at 2752.06. The DJ Transportation Index was the worst percentage performer losing -10.22%.
The NASDAQ fared worse during May, opening the month trading red on seven of eight days. Selling in big cap technology stocks and semiconductors after several companies suspended business with Chinese Telecom giant Huawei Technologies took the index below its 200-day moving average as the month ended. The Philadelphia Semiconductor Index tumbled -16.7%. The tech heavy NASDAQ extended its weekly losing streak to four as the month ended closing the period with a loss of 642.24 points (-7.93%) at 7453.15. The small cap Russell 2000 dropped 125.72 points (-7.90%) finishing at 1465.49.
The technical condition of the market deteriorated during the month as key support levels were broken and the major averages finished below their 200-day moving average. The technical indicators for the different indexes are in bearish territory while momentum, as measured by the 14-day RSI, is negative. The DJIA was able to find support at 24800 as the month closed, which is a 38.2% Fibonacci retracement level and often provides support for a stock or index. For the S&P 500, 2725 represents that level and for the NASDAQ, it’s 7400. With the Dow now leading the major averages lower, those could be support levels that if they hold, could bring in buyers. However, there is another bearish pattern that could be signaling that a steeper selloff is in the making. As the month ended the major averages broke the neckline of a bearish Head & Shoulders (H&S) reversal pattern. Though the pattern could be aborted with an oversold bounce, it does setup some potential downside targets for the different indexes if selling pressure escalates. By measuring the neckline to the top of the head of the chart, a downside target would be 24250 for the DJIA. This also represents a 50% retracement of the December-April rally. The same holds true for the S&P 500 and NASDAQ. Their H&S target and 50% retracement levels are 2650 for the S&P 500, and 7200 for the NASDAQ. It’s important to note that these patterns are often aborted over the short term. However, if the pattern plays out, it’s likely that the stock market is setting itself up for a rough summer. Lastly, breadth has been deteriorating and the NYSE Advance/Decline lines, leading indicators of market direction, continue to head lower while the number of new 52-week lows vs. new highs continue to expand, a bearish condition.
The major averages closed out the month extended to the downside and it’s possible that the market could find firmer footing as June gets underway. The S&P Short Range Oscillator finished the month at an oversold -5.6% and stochastics were all below 10 for the different indexes. Historically, the stock market will bounce off such oversold readings. Despite falling yields and still, for the most part, positive economic data in the U.S., Q2 earnings adjustments will be coming due and I would expect to see estimates cut to reflect the uncertainty that the trade war has caused. If the 200-day moving average becomes resistance in early June, the bulls are going to feel the heat over the summer and the stock market could trend lower into the fall. It might be prudent for investors to consider trimming positions and reduce exposure to equities if the major averages can’t regain their 200-day moving average.
MARKET POSTURE: Bullish
Based on the status of the Market Edge market timing models, the ‘Market Posture’ is Bullish as of the week ending 1/04/2019 (DJIA - 23433.16).
CYCLICAL TREND INDEX (CTI): Bullish
Presently the CTI is Positive at +2, down two notches from the previous week and extended. The counts for Cycles A, B, C and E are bullish while the count for Cycle D is bearish. The CTI is projected to remain Bullish for at least one more week before going into a prolonged Bearish count.
Cycle Average # Of Weeks # Of Weeks Since Bullish Or Bearish
In The Cycle Previous Bottom Connotation
A 6 + or -1 Week 10 Weeks Bullish
B 18+ or -2 Weeks 22 Weeks Bullish
C 36+ or -4 Weeks 22 Weeks Bullish
D 72+ or -7 Weeks 67 Weeks Bearish
E 21 + or -20 Weeks 134 Weeks Bullish
The following are projected CTI readings through the week ending 6/1/19.
Week Ending CTI Connotation
5/31/19 (Actual) +2 Bullish
6/07/19 (Projected) +2 Bullish
6/14/19 (Projected) +2 Bullsih
6/21/19 (Projected) -1 Bearish
6/28/19 (Projected) -1 Bearish
** The CTI is the total of the plus and minus values assigned to each cycle based on the number of weeks that have passed since their previous cyclical bottom. For a detailed explanation of the market timing models, click on "Market Letter Help" located on the top of the 'Market Letter'.
Market Posture Performance 2018-2019
The following is the performance record of the Market Edge ‘Market Posture’ for 2018 & 2019
Projected Strong Periods: Actual Results – DJIA
01/05/18 - 03/02/18 (25295.87 – 24538.06) DJIA Gain/Lossà -480.14
05/11/18 - 09/28/18 (24831.17 – 26458.31) DJIA Gain/Lossà +1370.68
01/04/19 - 03/15/18 (23433.16 – 25887.38) DJIA Gain/Lossà +2454.22
04/18/19 - ??? (26559.54 – ??? ) DJIA Gain/Lossà ???
Projected Weak Periods: Actual Results – DJIA
03/09/18 - 05/11/18 (25335.74 – 24831.17) DJIA Gain/Lossà -504.57
09/28/18 - 01/04/19 (26458.31 – 23433.16) DJIA Gain/Lossà -3025.15
*Market posture was neutral from 3/29/19-4/18/18
MOMENTUM INDEX: Neutral
As of the close on 5/31/19, the Momentum Index is Neutral at +3, down 4 notches from the previous month. The Momentum Index is a gauge of bullish or bearish divergence in the market. Readings of +04 and higher are regarded as bullish signaling stronger performance from the majority of the broader indexes vs. the DJIA. Conversely, readings of -04 or lower are regarded as bearish.
Prev. Lows DJIA DJTA S&P 500 NYSE R-2000 NASDAQ UTIL A/D LINE
Dec 2018 21792.20 8637.15 2351.10 10769.83 1266.92 6192.92 692.00 +403798
5/31/19 24815.04 9738.03 2752.06 12264.50 1465.49 7453.15 784.43 +436862
%Change 13.9% 12.7% 17.1% 13.9% 15.7% 20.3% 13.4% 8.2%
Average % Change of the Broad Market Indices: +15.3%
The broader market indexes are up on average -+15.3% from their Dec 2018 closing lows vs. +13.9% for the DJIA resulting in the Neutral +3 reading. Breadth was mixed during the month at the NYSE as the Advance/Decline Line lost 4759 units vs. a gain of 5518 units in April while the number of new 52-week highs out did the new lows on 15 of 22 sessions. Breadth at the NASDAQ was negative as the A/D decreased 7767 units after adding 3198 units in April, while the number of new lows surpassed the new highs on 15 out of 22 sessions. Finally, the percentage of NYSE stocks above their 50-day moving average fell to 25.8% from 59.7% while those above their 200-day dropped to 40.4% vs. 57.5% from the previous month. Readings above 70.0% denote an overbought condition.
SENTIMENT INDEX: Neutral
The Sentiment Index for the month ending 5/31/19 is Neutral at +0, unchanged from the previous month. The Sentiment Index is a measurement of the degree of optimism or pessimism prevalent in the market. Whenever the crowd becomes overly optimistic (a bearish condition), the readings from the Sentiment Index will drop into negative ground. Conversely, when fear is rampant (a bullish condition), the index will be in the +3 to +8 area.
The Dividend Yield Spread (1.01 vs. 1.17) is Bullish. NYSE short interest was up +2.2% for the period ending 5/15/19 vs. being down -1.8% at the end of April. Short interest at the NASDAQ was up +0.6% mid-May vs. a -0.8% decrease on 4/30/19. The Percentage of Bullish Investment Advisors (49.0% vs. 53.4%), the Bullish-Bearish Investment Advisors Ratio (2.8 vs. 2.9), the Fear and Greed Index (25.4 vs. 71.4) the Total Put/Call Ratio (1.15 vs. 0.92), the NAAIM Exposure Index (59.7 vs. 92.4) and VIX, a measurement of fear in the market, (18.71 vs. 12.73) are Neutral. The Percentage of Bearish Investment Advisors (17.3% vs. 18.4%) and the Delta Market Sentiment Index (44.1 vs. 73.2) are Bearish. VIX readings under 13.00 are regarded as bearish while those above 30.0 are bullish.
**To view the charts and graphs of the major market indexes and pertinent technical indicators that are incorporated in the Momentum and Sentiment indexes go to the Market-At-A-Glance section located under Market Recap on the Market Edge home page.
STRENGTH INDEXES: Bearish
The Strength Indexes were all lower and finished in bearish territory. The DJIA fell to 27.6% from 51.7%, while the S&P 100 dropped to 20.8% vs. 50.0% the previous month. The NASDAQ 100 tumbled to 18.6% from 48.0%. While readings above 50.0% indicate that the majority of the stocks in the index are under accumulation, it is the trend that tends to forecast future price direction. The Strength Indexes drifted lower throughout the month.
Take a look at the new ‘Dr. Market Edge Talks Stocks’ section located on the Markets or Home Page, directly above the ‘Market Letter (Weekly)’. Every Tuesday, the good Doctor reviews three stocks that have recently been in the news. These articles will help you evaluate stocks when viewing Smart Charts and the Second Opinion reports.
Calendar Of Technical Events
Date Event Connotation 05/31/2019 Price gap down Bearish 05/29/2019 Point & Figure Quadruple Bottom breakout Bearish 05/23/2019 21 day SMA cross below 50 day SMA Bearish 05/23/2019 50 day SMA slope turned down Bearish 05/08/2019 10 day SMA cross below 21 day SMA Bearish 05/08/2019 MACD LT turned bearish Bearish 05/07/2019 21 day SMA slope turned down Bearish 04/26/2019 MACD ST turned bearish Bearish 04/02/2019 Up/Down slope turned down Bearish 03/19/2019 50 day SMA cross above 200 day SMA Bullish 03/11/2019 Relative Strength turned bearish Bearish
**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:
DJIA: 24244 - Support - The 1/22/2019 low
DJIA: 26695 - Resistance - The 4/23/2019 high
DJIA: 26016 - 50-day simple moving average
DJIA: 25428 - 200-day simple moving average
S&P 500: 2722 - Support - the 3/08/2019 low
S&P 500: 2947 - Resistance - 5/03/2019 high
S&P 500: 2870 - 50-day simple moving average
S&P 500: 2775 - 200-day simple moving average
NASDAQ: 7332 - Support - the 3/08/2019 low
NASDAQ: 8164 - Resistance - the 5/03/2019 high
NASDAQ: 7869 - 50-day simple moving average
NASDAQ: 7524 - 200-day simple moving average
Industry Group Rankings: What's Hot (27) – What’s Not (64)
Of the 91 Industry Groups that we track, 27 are rated as either Strong or Improving while 64 are regarded as Weak or Deteriorating. The previous month’s totals were 58-33 The following are the strongest and weakest groups for the period ending 5/31/19. Strongest: Semiconductors & Related, Home Construction, Metals Non-Ferrous and Restaurants. Weakest: Oilfield-Equipment, Coal, Retailers-Drug Based and Aluminum.
SUGGESTIONS FOR SELECTING BUY CANDIDATES
1) Initiating new long positions for an intermediate-term trading approach:
a) Go to Stock Watch, select a list, click on the Opinion/Conditions drop down and then on Long for potential buy candidates. Click on the Situations drop down and then on Early Entry Longs.
b) Click on the Trading Ideas tab and then on Money Runner. Select stocks from the Today's Buy list.
c) For a more conservative approach, check out the ETF Center. Choose a category that is either 'Improving' or 'Strong' and then choose ETF's with Long Opinions as potential buys.
d) Click on the Trading ideas tab on the toolbar and then on Prime Ideas. Choose one of the five investment styles to retrieve a list of stocks that have both favorable technical and fundamental characteristics.
2) Initiating new positions for a short-term trading approach:
a) Click on Trading Ideas located on the toolbar. Then click on Trading Desk and select either NYSE or NASDAQ Short Term Buys.
b) Click on the Advanced Tools tab and then on either the Point & Figure Breakouts or Point & Figure Early Alert modules. Look for stocks that have either broken or are in the process of breaking either a Triple Top or Quadruple Top and have a Long Opinion for potential buy candidates.
SUGGESTIONS FOR SELECTING SHORT-SALE CANDIDATES
1) Initiating new short positions for an intermediate-term trading approach:
a) Go to Stock Watch, select a list, click on the Opinion/Conditions drop down and then on Avoid for potential short sale candidates. Click on the Situations drop down and then on Early Entry Shorts.
b) Click on the Trading Ideas tab and then on Money Runner. Select stocks from the Today's Shorts list as potential short sale candidates.
c) For a more conservative approach, check out the ETF Center. Choose a category that is either 'Deteriorating' or 'Weak' and then choose ETF's with Avoid Opinions as potential shorts.
d) Click on the Trading Ideas tab on the toolbar and then on Prime Ideas. Choose Short Sale Candidates for stocks that are considered to be broken momentum stocks.
2) Initiating new positions for a short-term trading approach:
a) Click on Trading Ideas located on the toolbar. Then click on Trading Desk and select either NYSE or NASDAQ Short Term Shorts.
b) Click on the Advanced Tools tab and then on either the Point & Figure Breakouts or Point & Figure Early Alert modules. Look for stocks that have either broken or are in the process of breaking either a Triple Bottom or Quadruple Bottom and have an Avoid Opinion for potential short sale candidates.