MARKET REVIEW – JANUARY 2020

It was a December to remember as the year and decade ended with the major averages extending their monthly hot streak of positive gains to four in a row. The DJIA tumbled nearly 600 points to start off the month as weak manufacturing data and tough talk on trade from the White House nearly wiped out the prior gains set in November, before positive trade signals and a strong jobs report steadied the ship. The Federal Reserve left interest rates unchanged at the December FOMC Meeting and a weakening US dollar gave a boost to commodities just as investors cheered the news of a ‘Phase I’ trade deal mid-month between the U.S. and China. As better than expected economic data and a rollback of potential tariffs were announced, the market began to hit its stride as the Dow, S&P 500 and NASDAQ went on a tear and posted a string of new all-time highs. Every sector except Industrials (XLI) finished in the green led by a +5.21% jump in Energy (XLE) on renewed hopes for global growth and demand. Technology (XLK), Utilities (XLU) and Healthcare (XLB) also outperformed. The DJIA went on to post new all-time highs on seven sessions as it finished up by 487.03 points (+1.74%), settling at 28538.44. For the year, the blue-chip index was up 22.34%. The S&P 500 recorded nine new all-time highs of its own during the month climbing 89.80 points (+2.86%) to close at 3230.78. For the year, the S&P 500 index finished up better than 28% and turned in its best yearly percentage performance since 2013. Finally, the DJ Transportation Index could not overcome poor earnings and news from Boeing (BA) but eked out a gain of 43.71 points (+0.40) to settle at 10901.28. For the year, the DJ Transportation Index finished higher by 18.87%

The NASDAQ outperformed the broader market aided by a +7.3% spike in the Philadelphia Semiconductor Index (SOX). Semiconductor maker Advanced Micro Devices surged +17.9% during the month and was the top performer for the year in the S&P 500. In fact, five of the top ten finishers in the S&P 500 were semiconductor companies. The tech heavy index benefited from hopes that a trade deal would open more opportunities for technology companies to gain access to China’s market. The FANG stocks were strong with shares of Apple Co. (AAPL) jumping +9.1% during the month. In addition, the big cap NASDAQ 100 continued its stellar performance as it also reeled off 10 straight sessions of new all-time highs and finished up the month higher by 3.92%. For the period, the NASDAQ gained 307.13 points (+3.54%) to finish at 8972.60. For the year, the NASDAQ was the highest percentage gainer, and ended up with a 35.22% gain. The small cap Russell 2000 continued its positive momentum and posted a gain of 43.97 points (+2.71%), finishing at 1668.47. The Russell 2000 saw meaningful gains this year as it gained 23.72% on the year.

MARKET OUTLOOK

The technical condition of the market improved in December as the major averages set a series of new record highs on the way to the best yearly performance for the S&P 500 since 2013. However, the market’s record run left the different indexes overbought going into the last week of the month by several measures. Fortunately, selling the last few days of December helped the market work off some of that overbought condition. The technical indicators remained bullish, but stochastic readings in the 80’s indicated that the major averages could still stand for some sideways to lower action. The S&P 500 finished the month more than 8% above its 50-day moving average (MA) which also tends to lead some selling. The last time the index was that extended was the week before the July selloff after the market hit new highs.

Bullish internal breadth confirmed the markets rally as the NYSE Advance/Decline Line, a leading indicator of market direction marked new all-time highs throughout the month, while the NASDAQ A/D Line hit its highest level since July. New 52-week highs also expanded during December showing broader participation in the rally.

The major averages enter the New Year just off record highs as investors count on a trade deal and a return to positive earnings growth in 2020. With Q4 earnings scheduled to roll out the week of January 13, analysts will be keying in on forward guidance in hopes that the ‘phase 1’ trade deal will lead to raised earnings estimates going forward. January is usually a barometer for the year and according to the ‘Stock Trader’s Almanac’, over the last 40 years a positive start to the month leads to a better than 80% chance of a positive yearly gain for equities. In presidential election years this indicator does even better. Again, according to the ‘Stock Trader’s Almanac, In the last 16 presidential election years, 14 full years followed the direction of the first five days of January.

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CYCLICAL TREND INDEX (CTI): Negative

Presently the CTI is Negative at -1, unchanged from the previous month. The count for Cycles C and D is bullish while the counts for Cycles A, B and E are bearish. The CTI is projected to remain negative into September.

The following are projected CTI readings through the week ending 6/1/19. 

** 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

MOMENTUM INDEX: Neutral

As of the close on 12/27/19, the Momentum Index is Neutral at +3, down 2 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: -0.5%

The broader market indexes are down on average -0.5% from their December 2019 closing highs vs. -0.4% for the DJIA resulting in the Neutral +3 reading. Breadth was positive during the month at the NYSE as the Advance/Decline Line gained 7804 units vs. a gain of 2505 units in November while the number of new 52-week highs surpassed the new lows on 20 out of 21 sessions. Breadth at the NASDAQ was also positive as the A/D line added 3572 units after gaining 3169 units in November, while the number of new highs surpassed the new lows on all but one session. Finally, the percentage of NYSE stocks above their 50-day moving average moved higher during the period to 74.8% from 69.2% while those above their 200-day rose to 71.5% vs. 66.0% the previous month. Readings above 70.0% denote an overbought condition. It should be noted that Oil was up 6.35% during the month while Gold was up 3.58% on the month.

SENTIMENT INDEX: Negative

The Sentiment Index for the month ending 12/27/19 is Negative at -5, down 3 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 (0.43 vs. 0.45) is Bullish. NYSE short interest was down -0.2% for the period ending 12/15/19 vs. being up +0.8% at the end of November. Short interest at the NASDAQ was down -0.3% mid-December vs. a -0.2% decrease on 11/30/19.  The VIX, a measurement of fear in the market, (13.43 vs. 12.62) is neutral. The Fear and Greed Index (91.20 vs. 72.00), AAII Bull-Bear Ratio (2.0 vs. 1.1), NAAIM Exposure Index (97.4 vs. 76.7), the Total Put/Call Ratio (0.85 vs. 1.02), the Percentage of Bullish Investment Advisors (57.7% vs. 58.2%), the Bullish-Bearish Investment Advisors Ratio (3.3 vs. 3.4), and the Percentage of Bearish Investment Advisors (17.3% vs. 17.1%) 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: Neutral

Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Neutral as of the week ending 11/22/2019 (DJIA – 27875.62). 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: 27325 - Support - The 12/03/2019 low
DJIA: 28701 - Resistance - The 12/27/2019 high
DJIA: 27737 - 50-day simple moving average
DJIA: 26699 - 200-day simple moving average

S&P 500: 3070 - Support - the 12/03/2019 low
S&P 500: 3247 - Resistance - 12/27/2019 high
S&P 500: 3110 - 50-day simple moving average
S&P 500: 2963 - 200-day simple moving average

NASDAQ: 8435 - Support - the 12/03/2019 low
NASDAQ: 9052 - Resistance - the 12/20/2019 high
NASDAQ: 8540 - 50-day simple moving average
NASDAQ: 8098 - 200-day simple moving average

ETF Center: The top performing ETF categories for the month ending 12/27/2019 were: Commodity-Precious Metals (+2.39%), Sector-Basic Materials (+1.64%), Sector-Alternative Energy (+1.20%), Sector-Internet (+1.08%) and Sector-Technology (+0.94%). The weakest categories were: Commodity-Base Metals (-2.60%), Shorts (-1.19%) and Commodity-Agriculture (-0.73%). To review all the categories in the Market Edge universe, click on the ETFs tab.

Industry Group Rankings: What's Hot (82) – What’s Not (9)

Of the 91 Industry Groups that we track, 82 are rated as either Strong or Improving while 9 are regarded as Weak or Deteriorating. The previous month’s totals were 61-30. The following are the strongest and weakest groups for the period ending 12/27/19. Strongest: Retail-Drug Based, Pharmaceuticals, Advertising and Metals/Non-Ferrous. Weakest: Home Construction, Household Products (Non-Durable), Telephone Systems and Building Materials. 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.