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Big Tech Earnings Fuel Rally

On The Edge (Monthly)

August 01, 2020
ON THE EDGE

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Big Tech Earnings Fuel Rally
Uptrend extends into August.

MARKET REVIEW – AUGUST 2020

 

With the month of July ushering in the dog days of summer, the major averages struggled to break out of a narrow trading range as the month’s strong start seemed to run out of gas as investors grappled with mixed Q2 earnings and rising coronavirus cases. Encouraging early Covid-19 trials however, kept investor sentiment positive as Moderna (MRNA), Pfizer (PFE), Johnson & Johnson (JNJ) and others raced to find a vaccine for the virus. A rotation out of big cap technology shares and into cyclical names on valuation concerns mid-month slowed the markets momentum but the DJIA, S&P 500 and NASDAQ were able to post positive for a fourth consecutive month off the March meltdown. The July FOMC Meeting ended with interest rates unchanged and comments from Fed Chair Jerome Powell, that the Federal Reserve was going to do whatever it takes to support markets, kept a floor under the market but weakened the US dollar, which fell to its lowest level since May 2018. Rising tensions between the US and China weighed on global markets towards the end of the month, and an uptick in New Jobless Claims saw the major averages struggle the last two weeks of July and the DJIA snapped a three-week win streak. On the flip side, blowout earnings from Apple Inc (AAPL), Amazon.com (AMZN) and Facebook (FB) the last day of the month sent the NASDAQ into August on a two-week win streak and just below its all-time high. Pockets of strength in July included strong housing data, which pushed Home Builders Lennar (LEN), DH Horton (DHI) and LGI Homes (LGIH) to new highs, as low interest rates pulled the 30-year mortgage below 3%. Semiconductors also outperformed led by gains in Advanced Micro Devices (AMD), NVIDIA (NVDA) and Qualcomm (QCOM), which surged to new highs after earnings.  The market gains were widespread as only Energy (XLE) finished July red, while Utilities (XLU), Communication Services (XLC), Consumer Discretionary (XLY) and Materials (XLB) outperformed. The DJIA notched its fourth consecutive monthly gain from the March collapse as it climbed 615.44 points (+2.38%) and settled at 26428.32. The S&P 500 turned in its best July since 2010 adding 170.83 points (+5.51%) to close at 3271.12. Finally, the DJ Transportation Index outperformed as it soared 822.09 points (+8.96%) to close at 9994.81 as trucking stocks JB Hunt Transportation Services (JBHT), Landstar (LSTR) and Knight Transportation (KNX) offset losses in airlines.

 

The tech laden NASDAQ and NDX100 continued to outperform in July with each index posting new all-time highs on six sessions during the early part of the month. As mentioned before, strong performances from the FANG stocks continued to dominate despite Google parent Alphabet (GOOG) missing revenue targets for the first time since going public. The Philadelphia Semiconductor Index (SOX) surged more than 7% for a second consecutive month ending the period at a new record high. For the period, the NASDAQ jumped 686.50 points (+6.82%) and settled at 10745.27. The small cap Russell 2000 had a solid month adding 39.06 points (+2.71%) and finished at 1480.43.

 

 

MARKET OUTLOOK

 

The technical condition of the market improved in July as the NASDAQ and NASDAQ 100 posted new record highs, while the S&P 500 hit a new recovery high as July ended. The market ventured into overbought territory midmonth with the S&P Short Range Oscillator hitting +5.67% on 7/23 but the different indexes consolidated some of the gains, working off its overbought condition. The technical indicators were back in neutral to bullish ground as the month ended and the major averages were all trading above key moving average support levels heading into August. Momentum, as measured by the 14-day RSI, was positive but was slowing as July ended.

 

Breadth was mixed this month, but the NYSE Advance/Decline line hit new record highs on three sessions while the NASDAQ A/D line hit several recovery highs during the month showing stocks were under accumulation. However, negative divergence was recorded in the Market Edge Strength Indexes which saw the DIA and QQQ slip into negative ground. The Strength Indexes measure the percent of stocks in the indexes that are under accumulation based on the U/D Volume calculations and could be hinting that August may once again be a vociferous month. Since 1987, August is the worst month of the year for the major averages.

 

 

 

CYCLICAL TREND INDEX (CTI): Positive

Presently the CTI is Positive at +11, up 8 units from the previous month. The counts for Cycles C, D, and E are bullish while the counts for Cycles A and B are bearish.

 

 

Cycle

Average # Of Weeks

In The Cycle

# Of Weeks Since

Previous Bottom

Bullish Or Bearish

Connotation

A

6 +  or    -1 Week

7  Week

Bearish

B

18+  or    -2 Weeks

18 Weeks

Bearish

C

36+  or    -4 Weeks

18 Weeks

Bullish

D

72 + or    -7 Weeks

18 Weeks

Bullish

E

216 + or   -20 Weeks

18 Weeks

Bullish

 

 

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

 

Week Ending

CTI

Connotation

7/31/20 (Actual)

2

Bullish

8/07/20 (Projected)

13

Bullish

8/14/20 (Projected)

13

Bullish

8/21/20 (Projected)

13

Bullish

8/28/20 (Projected)

13

Bullish

 

 

** 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

 

Projected Strong Periods:

 

Actual Results – DJIA

05/11/18 -  09/28/18  (24831.17 – 26458.31)

DJIA Gain/Loss

+1370.68

01/04/19 -  03/15/19  (23433.16 – 25887.38)

DJIA Gain/Loss

+2454.22

04/18/19 -  08/02/19 (26559.54 – 26485.01)

DJIA Gain/Loss

-74.53

09/03/19 -  11/22/19 (27219.52 – 27865.62)

DJIA Gain/Loss

+646.10

04/09/20 -     ???      (23719.37 –      ???   )

DJIA Gain/Loss

???

 

 

 

Projected Weak Periods:

 

Actual Results – DJIA

03/09/18  - 05/11/18  (25335.74 – 24831.17)

DJIA Gain/Loss

-504.57

09/28/18  - 01/04/19  (26458.31 – 23433.16)

DJIA Gain/Loss

-3025.15

08/02/19  - 09/03/19  (26485.01 – 27219.52)

DJIA Gain/Loss

+734.51

01/03/20  - 02/14/20  (28634.88 – 29398.08)

DJIA Gain/Loss

+763.20

 

 

MOMENTUM INDEX: Bullish

As of the close on 7/31/20, the Momentum Index is Positive at +6, up 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.

 

 

Prev. Lows

DJIA

DJTA

S&P 500

NYSE

R-2000

NASDAQ

UTIL

A/D LINE

Mar. 2020

18591.93

6703.68

2237.40

8777.38

991.16

6860.67

610.89

+454420

7/31/20

26428.32

9994.81

3271.12

12465.05

1480.43

10745.27

830.77

+479880

%Change

42.1%

49.1%

46.2%

42.0%

49.4%

56.6%

36.0%

5.6%

 

 

Average % Change of the Broad Market Indices: +42.6%

 

The broader market indexes are up on average +42.6% from their March 2020 closing lows vs. +42.1% for the DJIA resulting in the Bullish +6 reading. Breadth was positive during the month at the NYSE as the Advance/Decline Line gained 4760 units vs. a gain of 5066 units in June while the number of new 52-week highs surpassed the new lows on all 22 sessions. The breadth at the NASDAQ was mixed as the A/D line lost 998 units after gaining 5210 units in June, while the number of new highs surpassed the new lows on all 22 sessions. Finally, the percentage of stocks above their 50-day moving average declined during the period to 65.5% from 68.3% while those above their 200-day increased to 48.1% vs. 33.0% from the previous month. Readings above 70.0% denote an overbought condition. Oil increased moderately and finished at $40.43 (+1.84%) for the September contract while Gold surged higher by +11.94%.

 

SENTIMENT INDEX: Negative

The Sentiment Index for the month ending 7/31/20 is Negative at -2, down two 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 (0.77 vs. 0.51) and the AAII Bull-Bear Ratio (0.4 vs. 0.5) are Bullish. NYSE short interest was down -3.1% and 7.4 days average volume for the period ending 7/15/20 vs. being up +1.9% and 9.0 days average volume at the end of June. Short interest at the NASDAQ was down -3.0% and 1.9 days average volume mid-July vs. a +5.2% increase and 1.9 days average volume on 6/30/20. VIX, a measurement of fear in the market, (24.46 vs. 34.73) and the Fear and Greed Index (63.2 vs. 50.6) are Neutral. The NAAIM Exposure Index (97.4 vs. 76.6), the Percentage of Bullish Investment Advisors (57.3% vs. 57.3%), the Percentage of Bearish Investment Advisors (17.5% vs. 18.4%), the Bullish-Bearish Investment Advisors Ratio (3.3 vs. 3.1), and the Total Put/Call Ratio (0.83 vs. 0.93) 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

Date  EventConnotation
07/30/2020  200 day SMA slope turned downBearish
07/27/2020  MACD ST turned bearishBearish
07/22/2020  Up/Down slope turned upBullish
07/17/2020  Relative Strength turned bearishBearish
07/13/2020  Point & Figure Double Top breakoutBullish
07/13/2020  10 day SMA cross above 21 day SMABullish
07/13/2020  21 day SMA slope turned upBullish
06/24/2020  Price gap downBearish
06/11/2020  Price down more than 5% with volume up more than 200%Bearish
05/21/2020  50 day SMA slope turned upBullish
05/04/2020  21 day SMA cross above 50 day SMABullish

**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: 24843 - Support - The 06/15/2020 low
DJIA: 27580 - Resistance - The 06/08/2020 high
DJIA: 25852 - 50-day simple moving average
DJIA: 26234 - 200-day simple moving average

S&P 500: 2965 - Support - the 6/15/2020 low
S&P 500: 3279 - Resistance - 7/22/2020 high
S&P 500: 3104 - 50-day simple moving average
S&P 500: 3041 - 200-day simple moving average

NASDAQ: 9403 - Support - the 6/15/2020 low
NASDAQ: 10839 - Resistance - the 07/21/2020 high
NASDAQ: 9932 - 50-day simple moving average
NASDAQ: 8939 - 200-day simple moving average

 

 

 

ETF Center: The top performing ETF categories for the week ending 7/30/20 were: Sector-Technology (+3.82%), Sector-Real Estate (+3.68%), Growth-Small Cap (+2.72%), Commodity-Precious Metals (+2.60%), and Blend-small Cap (+2.53%). The weakest categories were: Sector-Energy (-2.57%), Commodity-Energy (-1.95%), Shorts (-1.20%), Sector-Basic Materials (-0.46%) and Sector-Financial (-0.38%). 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 84-7. The following are the strongest and weakest groups for the period ending 7/31/20. Strongest: Other Recreation, Casinos, Home Furnishings/Appliances and Home Construction. Weakest: Coal, Oilfield-Integrated Majors, Gas Companies 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.

 

 

 

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Market Indicators

Market Posture Cyclical Trend Index
Bullish
+13
As of: 05/29/2020
As of: 08/07/2020
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Second Opinion Performance

Second Opinion Status

3190

Current Opinions
As of: 08/10/2020

92%

Long Accuracy
As of: 08/10/2020

42%

Avoid Accuracy
As of: 08/10/2020
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Market Recap - 08/10/2020

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 10968.36 -42.62 -0.39% 22.24%
DJ UTILITIES 841.03 -2.2 -0.26% -4.33%
DJ TRANSPORT 10864.94 288.56 2.73% -0.33%
DJ INDUSTRIALS 27791.44 357.96 1.3% -2.61%
NYSE COMPOSITE 12844.02 78.18 0.61% -7.68%
S & P 100 INDEX 1550.69 2.79 0.18% 7.52%
RUSSELL 2000 1584.67 15.49 0.99% -4.27%
S&P 500 3360.47 9.19 0.27% 4.01%
CBOE MKT VOLATILITY 22.13 -0.08 -0.36% 60.59%
AMEX COMPOSITE 2168.21 30.9 1.45% -15.05%
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