MARKET REVIEW – OCTOBER 2020

The rally off the March lows ground to a halt in September, following a record setting August that left the major averages overbought. The month got off to fast start with the S&P 500, NASDAQ and NASDAQ 100 all setting new record highs, while the DJIA punched a new recovery high. However, the melt up hit a snag as a selloff in big cap technology companies led to the NASDAQ falling into correction territory (-10%) in just three sessions. The Dow lost 1599.61-points (-5.5%) during that same timeframe. As volatility ticked up with VIX recording its highest reading since mid-July (31.46), investors were whipsawed as blowout earnings from the likes of Oracle (ORCL), FedEx (FDX) and Adobe (ADBE) were offset by mixed economic data and rising trade tensions with China. Furthermore, a stalemate in Congress over the second round of a coronavirus stimulus package, combined with the Federal Reserve’s grim outlook for a recovery continued to rattle nerves. Investors rotated into cyclical parts of the market during the month but by mid-September all of the major indices broke below their respective 50-day moving averages. The fall below that important support level was the first time since April that this occurred for the Dow, S&P 500, NASDAQ and NASDAQ 100, while the DJ Transportation and DJ Utilities outperformed. Towards the end of the period, renewed optimism surrounding the stimulus bill caused the major averages to mount a snap back above their 50-day moving averages but did little to unwind the wave of selling during September. Crude oil prices slipped during the month on slowing growth concerns brought on from spreading Covid-19 cases as well as buildup in stockpiles ending September below $40 a barrel. Safe haven gold also tumbled, falling from a high of 2069.40 to 1866.30 (-9.8%) but rebounded some as the month ended. Utilities (XLU) was the only sector that eked out a gain during the month, while Energy (XLE) was the worst performing sector, sinking -16.53%. Technology (XLK), Communication Services (XLC), Financials (XLF) and Consumer Discretionary (XLY) also lagged the broader market. The DJIA snapped its post-recovery monthly win streak as it fell 648.35 points (-2.28%) and settled at 27781.70. The blue-chip index however, ended the quarter higher by 8.7%, for its best third quarter since 2010. The S&P 500 closed out September lower by -137.31 points (-3.92%) for its first monthly loss since March and worst September since 2011.

Following a strong summer, both the NASDAQ and NASDAQ 100 collapsed during the month as they were in correction territory for most of the month before rallying towards the end of the period, closing back above their respective 50-day moving average. FAANG stocks were hit hard with profit taking, led by Facebook (FB), Apple Inc. (AAPL) and Alphabet (GOOG) losing better than -10%. The Philadelphia Semiconductor Index (SOX) was also down for the month (-0.72%) but managed to regain its 50-day moving average on a late +7.4% surge as September ended. The NASDAQ Biotechnology ETF was only down (-0.19%). For the period, the NASDAQ lost 607.95 points (-5.16%) and settled at 11167.51, but managed to finish off its best third quarter in a decade. The small cap Russell 2000 was also a laggard for the month losing 54.19 points (-3.47%) and finished at 1507.69.

MARKET OUTLOOK

The technical condition of the market deteriorated last month as the major averages drifted lower and traded below their respective 50-day moving average (MA) for most of September. The technical indicators fell into negative territory mid-month and the different indexes were oversold going into the last week of the period with the S&P Short Range Oscillator hitting its lowest reading since the end of March (-4.13%). A late rally looked to snap a four-week losing streak for the Dow and S&P 500 and brought the major averages off the lows as the month ended, leaving all of the major averages back above their respective 50-day MA. The DJ Transportation Index outperformed during the month which is a positive going forward and ended the month about 2% off its all-time high. The Philly Semiconductor Index also showed positive divergence, but closed September about -5% off its record closing high. The small cap Russell 2000 struggled and was unable to close above its 50-dy MA.

Internal breadth was negative in September with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, trending down throughout the month. The NYSE Advance/Decline last made a new high in mid-August. The number of new 52-week highs contracted during the month and the number of new 52-week lows outnumbered the highs several times as September was ending. Investor Sentiment came off frothy highs mid-month and went into October neutral.

The market was flashing mixed signals as September was ending but had worked off its oversold condition. The major averages look likely to be stuck in a trading range as we head into October due to rising global coronavirus cases and the upcoming presidential election.  If the election remains up for grabs as October comes to a close, further weakness in the market is likely. Look for the DJIA to trade between 26,300 and 28,500. The S&P 500 could move between 3200 and 3550, with 10,500 to 11.750 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): Positive

Presently the CTI is Positive at +7, down 6 units from the previous month. The counts for Cycles A, B, D and E are all bullish while the counts for Cycle C is bearish.

The following are projected CTI readings through the week ending 4/24/20. 

** 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 2018-2020

The following is the performance record of the Market Edge ‘Market Posture’ for 2018 - 2020

MOMENTUM INDEX: Bullish

As of the close on 9/25/20, the Momentum Index is Positive at +4, down two 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. Below is a chart of the performance of seven of the major, broad market indexes included in the Momentum Index vs. the DJIA since the last major cyclical low.

Average % Change of the Broad Market Indices: +45.4%

The broader market indexes are up on average +45.4% from their March 2020 closing lows vs. +46.2% for the DJIA resulting in the Bullish +4 reading. Breadth was mixed during the month at the NYSE as the Advance/Decline Line lost 3863 units vs. a gain of 3406 units in August while the number of new 52-week highs surpassed the new lows on 14 out of 18 sessions. The breadth at the NASDAQ was also mixed as the A/D line lost 4790 units after adding 1691 units in August, while the number of new lows surpassed the new highs on 11 out of 18 sessions. Finally, the percentage of stocks above their 50-day moving average decreased during the period to 20.8% from 69.8% while those above their 200-day dropped to 43.9% vs. 56.5% from the previous month. Readings above 70.0% denote an overbought condition. Oil posted a loss for the month and finished at $40.22 (-5.61%) for the November contract while Gold was marginally down by -4.07%.

SENTIMENT INDEX: Neutral

The Sentiment Index for the month ending 9/25/20 is Neutral at +1, up five notches from the previous month. The Sentiment Index tracks thirteen market indicators that measure excessive bullish or bearish conditions 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 (0.57 vs. 0.52) and the AAII Bull-Bear Ratio (0.5 vs. 0.8) are Bullish. NYSE short interest was down -2.9% and 1.6 days average volume for the period ending 9/15/20 vs. being down -2.6% and 5.9 days average volume to cover at the end of August. Short interest at the NASDAQ was down -0.6% and 2.2 days of average volume mid-August vs. a -0.6% decrease and 2.1 days average volume to cover on 7/31/20. VIX, a measurement of fear in the market, (26.38 vs. 22.96), Bullish-Bearish Investment Advisors Ratio (2.7 vs. 3.7), NAAIM Exposure Index (55.3 vs. 106.6), Percentage of Bullish Investment Advisors (51.5% vs. 60.0%), and the Fear and Greed Index (49.80 vs. 73.6) are Neutral. The Total Put/Call Ratio (0.87 vs. 0.77) and Percentage of Bearish Investment Advisors (19.4% vs. 16.2%) 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.

MARKET POSTURE: Bullish

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. The Market Posture is expected to remain bullish through the first week of July. For a closer look at the technical indicators and studies that make up the market timing models, check out the 'Market Letter (Weekly)' located on the Market Edge home page. (www.marketedge.com).

Take a look at the new ‘Dr. Market Edge Talks Stocks’ section located on the Markets or Home Page.  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

**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: 25992 - Support - The 07/30/2020 low
DJIA: 29568 - Resistance - The 02/12/2020 high
DJIA: 27278 - 50-day simple moving average
DJIA: 26299 - 200-day simple moving average

S&P 500: 3200 - Support - the 7/24/2020 low
S&P 500: 3588 - Resistance - 9/2/2020 high
S&P 500: 3322 - 50-day simple moving average
S&P 500: 3097 - 200-day simple moving average

NASDAQ: 10217 - Support - the 7/24/2020 low
NASDAQ: 12074 - Resistance - the 09/2/2020 high
NASDAQ: 10939 - 50-day simple moving average
NASDAQ: 9420 - 200-day simple moving average

ETF Center: The top performing ETF categories for the week ending 9/24/20 were Shorts (+8.22%) and Bond-Government Long Term (+0.72%). The weakest categories were: Blend-Small Cap (-8.09%), Sector-Energy (-7.52%), Sector-Financial (-7.24%), Sector-Basic Materials (-6.88%) and Commodity-Precious Metals (-6.76%). To review all the categories in the Market Edge universe, click on the ETFs tab.

Industry Group Rankings: What's Hot (33) – What’s Not (58)

Of the 91 Industry Groups that we track, 33 are rated as either Strong or Improving while 58 are regarded as Weak or Deteriorating. The previous month’s totals were 57-34. The following are the strongest and weakest groups for the period ending 9/24/20. Strongest: Casinos, Other Recreation, Coal and Home Furnishings/Appliances. Weakest: Oilfield-Integrated Majors, Retailers-Drug-Based, Oil-Secondary and Savings & Loans. To review all the Industry Group rankings, click on the Industries tab

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.