MARKET REVIEW – FEBRUARY 2020

A robust start to the New Year and decade ended with a thud with several of the major averages posting their first monthly decline since last August. Stocks rallied on the first trading day of the year to close at fresh record highs but a conflict with Iran the following day, saw the major averages struggle to regain momentum until mid-month. The signing of the long awaited ‘Phase One’ trade deal between the US and China sparked a parabolic rally that sent the DJIA, S&P 500, NYSE, NASDAQ, NASDAQ 100 and DJ Utility Index to new record highs. Better than expected earnings from big cap tech stocks like Apple Inc (AAPL), Microsoft (MSFT) and Lam Research (LRCX) kept the market at or near all-time highs but an outbreak of the Coronavirus out of China took its toll on investors as the month wrapped up. Volatility picked up and after the DJIA topped out at 29348.10, it went on a five-day tumble, dropping 812.30 points (-2.7%), and wiped out the year-to-date gains. The different indexes were able to rebound after the
Federal Reserve left interest rates unchanged and delivered a dovish forecast at the conclusion of the January FOMC Meeting, but the wheels came off the bus on the last day of the month. The Dow lost 603.41 points (-2.1%) as investors fretted over the impact of the Coronavirus on global growth. The selling saw yields move lower and the 10-year/3-month Treasury yield inverted. Crude oil prices also slipped on slowing growth concerns and landed in bear market territory, down more than -20% from its January high. With investors on edge and turning defensive, the various sectors were mixed with Utilities (XLU), Technology (XLK), and REITs (XLRE) finishing in the green while Energy (XLE), Basic Materials (XLB), Healthcare (XLV) and Financials (XLF) were down sharply. In the end, the DJIA went on to post new all-time highs on five sessions but finished down for the month by 282.41 points (-0.99%), settling at 28256.03. The S&P 500 recorded six new all-time highs of its own but also succumbed to weakness at the end and fell 5.26 points (-0.16%) to close at 3225.52. Finally, the DJ Transportation Index which bumped up close to new 52-week highs mid-month, fell back to its lowest level since last December as it lost 334.54 points (-3.07%) to settle at 10566.74.

The tech laden NASDAQ was the biggest percentage gainer of the major averages and along with the NASDAQ 100 and DJ Utility Index one of the few indexes to finish January in the plus column. With Phase 1 of the US/China trade deal in the rear-view mirror, investors were ‘risk on’ and the NASDAQ posted new all-time highs on eight sessions hitting a high of 9402.48 before selling off as the month ended. However, the euphoria was not broad based as the Philadelphia Semiconductor Index fell over 3% while the Biotechnology ETF (IBB) also fell over 5% as concerns over a possible Sanders administration dimmed long-term prospects for healthcare stocks. For the period, the NASDAQ gained 178.34 points (+1.99%) to finish at 9150.94. The small cap Russell 2000 also backed off near its 52-week high mid-month and fell lower by 54.41 points (-3.26%), finishing at 1614.06.

MARKET OUTLOOK

The technical condition of the market deteriorated as the month was ending. The technical indicators for the different indexes were neutral to negative after the late selloff with MACD ST, a short-term trend measure, bearish for the different indexes and momentum, as measured by the 14-day RSI, negative except for the NASDAQ and NASDAQ 100. The DJ Transportation Index and small cap Russell 2000 were again showing negative divergence and leading the broader market lower. Both indexes finished the month trading below their respective 50-day moving average (MA), and the DJ Transports breaking below its 100-day MA. After becoming overbought by almost any measure during the month, the major averages were able to work off their overbought condition but only the transports and small caps finished January oversold based on stochastic readings below 20. Breadth was mixed with the NYSE and NASDAQ Advance/Decline lines trending lower into February and the NYSE A/D line last hitting a new high mid-January. New 52-week highs vs. new 52-week lows also contracted as the month ended. On the plus side, investor sentiment was reigned in and slipped back into Neutral ground after reaching its highest level since January 2018 earlier.

Despite the market stumbling into February, the current selloff is not likely to lead to a market correction unless the Coronavirus outbreak ends up being something more than what health officials are projecting. With the Federal Reserve injecting funds back into the repo market, low rates, coupled with +2% economic growth, traders are likely to keep buying the dips. However, China's Shanghai Index was still closed as January ended, and how that market opens on February 3 remains an unknown. At this stage weakness in the market isn’t expected to exceed more than 5-7%. If that’s the case, a list of stocks that beat Q4 earnings and raised guidance for 2020 would be a solid first choice of stocks to buy when considering putting new funds back into the market. First downside targets for the DJIA and S&P 500 were hit the last week of January. Secondary levels for the major averages are 27,900-28000 for the Dow, 3150-3180 for the S&P 500 and 8940-9000 for the NASDAQ.

CYCLICAL TREND INDEX (CTI): Negative

Presently the CTI is Negative at -3, 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 2/28/20. 

** 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 2018-2019

The following is the performance record of the Market Edge ‘Market Posture’ for 2018 & 2019

MOMENTUM INDEX: Neutral

As of the close on 1/31/20, the Momentum Index is Neutral at +1, 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: -0.1  %

The broader market indexes are down on average -0.1% from their December 2019 closing highs vs. -1.4% for the DJIA resulting in the Bearish +3 reading. Breadth was barely positive during the month at the NYSE as the Advance/Decline Line gained 306 units vs. a gain of 2505 units in December while the number of new 52-week highs surpassed the new lows on each session. The breadth at the NASDAQ was mixed as the A/D line dropped 3100 units after gaining 3572 units in December, while the number of new highs surpassed the new lows on 19 out of 21 sessions. Finally, the percentage of NYSE stocks above their 50-day moving average dropped during the period to 49.0% from 74.8% while those above their 200-day slipped to 63.9% vs. 71.5% from the previous month. Readings above 70.0% denote an overbought condition. It should be noted that Oil was down -15.29% during the month while Gold was up +4.50% on the month.

SENTIMENT INDEX: Neutral

The Sentiment Index for the month ending 1/31/20 is Neutral at 0, 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 (0.28 vs. 0.43) is Bullish. NYSE short interest was down -0.4% for the period ending 1/15/20 vs. being up +1.1% at the end of December. Short interest at the NASDAQ was up +0.2% mid-January vs. a +1.7% increase on 12/31/19. The VIX, a measurement of fear in the market, (18.84 vs. 13.43), Percentage of Bullish Investment Advisors (52.8% vs. 57.7%), the Bullish-Bearish Investment Advisors Ratio (2.8 vs. 3.3), The Fear and Greed Index (54.6 vs. 91.2), AAII Bull-Bear Ratio (0.9 vs. 2.0), and the NAAIM Exposure Index (77.1 vs. 97.4) are Neutral. The Total Put/Call Ratio (0.94 vs. 0.85) and the Percentage of Bearish Investment Advisors (18.9% vs. 17.3%) 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: Bearish

Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bearish as of the week ending 1/03/2020 (DJIA – 28634.88). 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: 29373 - Resistance - The 01/17/2020 high
DJIA: 28439 - 50-day simple moving average
DJIA: 27024 - 200-day simple moving average

S&P 500: 3070 - Support - the 12/03/2019 low
S&P 500: 3337 - Resistance - 01/22/2020 high
S&P 500: 3211 - 50-day simple moving average
S&P 500: 3011 - 200-day simple moving average

NASDAQ: 8435 - Support - the 12/03/2019 low
NASDAQ: 9451 - Resistance - the 01/24/2020 high
NASDAQ: 8941 - 50-day simple moving average
NASDAQ: 8258 - 200-day simple moving average

ETF Center: The top performing ETF categories for the week ending 1/30/20 were: Shorts (+1.60%), Bond-Government Long Term (+1.53%) and Bond-International (+0.61%). The weakest categories were: Commodity-Base Metals (-4.59%), Sector-Energy (-3.17%), International-Emerging (-2.96%), Commodity-Blend (-2.79%) and Commodity-Energy (-2.38%).

Industry Group Rankings: What's Hot (39) – What’s Not (52)

Of the 91 Industry Groups that we track, 39 are rated as either Strong or Improving while 52 are regarded as Weak or Deteriorating. The previous month’s totals were 75-16. The following are the strongest and weakest groups for the period ending 1/30/20. Strongest: Semiconductors & Related, Pharmaceuticals, Advertising and Precious Metals. Weakest: Aluminum, Household Products (Non-Durable), Oil-Secondary and Telephone Systems. 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.