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One For The Books

On The Edge (Monthly)

January 03, 2021
ON THE EDGE

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One For The Books
Major averages close out wild year at record highs.

MARKET REVIEW – JANUARY 2021

 

This December marked the close of a wild year in the stock market that saw the major averages finish on a high note. The month got off to a hot start with the UK granting emergency use of Pfizer’s (PFE) Covid-19 vaccine while Congress revived talks around a $908B relief package before unemployment benefits expired. The DJIA responded with a 579.62 point (+1.9%) four-day rally that left the major averages at new record highs. It took the blue chips another two weeks to scale those heights again, but the tech heavy NASDAQ went on to post a series of all-time highs on strength in semiconductors and big cap technology names. The market continued to nudge higher as the Federal Reserve meeting left rates unchanged, while global markets pushed to new record highs as Covid-19 vaccines were administered. Ongoing stimulus deliberations kept the downside limited as the NASDAQ powered higher on 6 of 9 sessions mid-month while posting five new all-time highs in the process. However, the broader indexes hit a speed bump towards the back half of the month as economic indicators came in mixed with weekly jobless claims remaining stubbornly elevated. Furthermore, a combination of a cyber-attack on US government agencies and the inability of Congress to pass a stopgap relief bill for coronavirus victims gave investors a reason to take profits. With a new strain of the coronavirus being discovered late in the month in the UK, investor worries rose further as travel related stocks bore the brunt of the concern. In the end, the long-awaited and heavily debated relief package was finally signed by President Trump during the final week of the period, giving a lift to all the major indexes which finished the year at new all-time highs. Decembers climb was broad based with every sector finishing in the plus column led by a +6.31% in Financials (XLF) after the yield spread increased as the 10-year Treasury flirted with +1.0% before ending at .91%. Technology (XLK), Energy (XLE), Healthcare (XLV) and Communication Services (XLC) also outperformed. The US Dollar continued to weaken throughout the month and hit levels last seen in 2018. That weakness in the dollar gave a boost to Emerging Markets and commodities. The iShares Emerging Markets ETF (EEM) hit a record high as December ended surging +6.0% on the month. Copper, a leading indicator of economic activity, was strong, and reached a seven-year high in price. The DJIA posted five new -all-time highs during the month as it finished up 967.84 points (+3.27%) and settled at 30606.48. For the year, the blue-chip Index finished higher by 7.2%. The S&P 500 posted seven new record highs of its own as it rose 134.44 points (+3.71%), finishing at 3756.07, which amounts to an annualized gain of 16.3% Finally, the DJ Transportation Index managed to eke out a gain this month as it finished up by 56.76 points (+0.46%), which was good for 14.7% for the year.

 

The tech laden NASDQ and NDX 100 indexes outperformed all month long, as investors rotated back into some stay-at-home technology companies that should have some staying power post pandemic. The Philadelphia Semiconductor Index (SOX) led the way higher as it soared 4.96% while the NASDAQ Biotechnology ETF was also higher by 4.49% after posting a record high mid-month. For the period, the NASDAQ finished off the year by posting ten new all-time highs during the month, as it soared 689.54 points (+5.65%) and ended at 12888.28. The NASDAQ’s 43.6% year-over-year gain was the biggest for the index since 2009. Finally, the small cap Russell 2000 also enjoyed a robust month and year, capping it off by being the biggest percentage gainer as it climbed 155.04 points (+8.52%) to finish at 1974.86. That was good for an 18.36% annualized increase. 

 

 

MARKET OUTLOOK

The technical condition of the market remained bullish in December as the major averages were able to touch new record highs. The technical indicators finished the month mostly in positive territory, but negative divergence was beginning to show in the different indicators for the DJ Transportation Index and small cap Russell 2000. While the transports traded in a narrow range throughout the month, Momentum slipped into neutral territory and MACD ST, a measure of the short-term trend, had crossed into bearish ground. The Russell 2000 went into the last week of December very overbought by several measures after an eight-week win streak. Though the technical indicators finished mixed, some consolidation in the small cap index was needed before it could see healthy new highs to start the New Year. Market technicians like to see the DJ Transportation Index and Russell 2000 lead the market, both higher and lower, and this negative divergence could be a warning of some market weakness to start the year.  Underlying breadth was bullish in December but was losing momentum as the period ended. The NYSE Advance/Decline line, which is a leading indicator of market direction, hit several new highs throughout the month, but only gained 1500 units over the last two trading weeks. The NASDAQ Advance/Decline line was negative the last week of the year, despite the index hitting a new high. New 52-week highs also contracted as the month ended showing fewer stocks pushing the different indexes into record territory.

 

Investor sentiment hit extreme bullish levels during December as investors rushed the train to not miss the rally. These sentiment indicators become contrarian indicators when they reach extreme readings. The Percentage of Bullish Advisors was above 60% for more than six straight weeks and investors were piling on margin debt. FINRA showed Debit Balances in Customers' Securities Margin Accounts reached a record high of $722,118,000 in November. That is another contrarian indicator that could lead to a sharper selloff if margin-calls were to come into play during any market weakness.

 

Most market participants and analysts are calling for the current Bull market to continue through 2021 and I tend to agree. With the amount of global stimulus from Central Banks and a ramp up in vaccinations to fight the coronavirus, we may be looking at a new "Roaring 20's". While market returns this year have been more than anyone would have projected in March, there’s no sign yet that a vaccinated Bull can’t continue his run in 2021.

 

CYCLICAL TREND INDEX (CTI): Positive

Presently the CTI is Positive at +9, down 5 units from the previous month. The counts for Cycle A, B, C, D, and E are bullish.

 

 

Cycle

Average # Of Weeks

In The Cycle

# Of Weeks Since

Previous Bottom

Bullish Or Bearish

Connotation

A

6 +  or    -1 Week

4 Weeks

Bullish

B

18+  or    -2 Weeks

9 Weeks

Bullish

C

36+  or    -4 Weeks

9 Weeks

Bullish

D

72 + or    -7 Weeks

40 Weeks

Bullish

E

216 + or   -20 Weeks

40 Weeks

Bullish

 

 

The following are projected CTI readings through the week ending 1/29/21. 

 

Week Ending

CTI

Connotation

12/31/20 (Actual)

 9

Bullish

1/08/21 (Projected)

 9

Bullish

1/15/21 (Projected)

 9

Bullish

1/22/21 (Projected)

 3

Bullish

1/29/21 (Projected)

 2

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 - 10/23/20   (23719.37 – 28335.57)

DJIA Gain/Loss

+4616.20

11/13/20 -      ???      (29410.00 –      ???    )

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

08/01/19  - 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

10/30/20  - 11/13/20  (26501.60 – 29410.00)

DJIA Gain/Loss

+833.50

 

 

MOMENTUM INDEX: Positive

As of the close on 12/31/20, the Momentum Index is Positive at +4, unchanged 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

Oct 2020

26501.60

10945.62

3269.96

12415.42

1538.48

10911.59

857.77

+480260

12/31/20

30606.48

12506.93

3756.07

14524.80

1974.86

12888.28

864.64

+500371

%Change

+15.5%

+14.3%

+14.9%

+17.0%

+28.4%

+18.1%

0.8%

+4.2%

 

 

Average % Change of the Broad Market Indices: +14.3%

 

The broader market indexes are up on average +14.3% from their October 2020 closing lows vs. +15.5% for the DJIA resulting in the Bullish +4 reading. Breadth was positive during the month at the NYSE as the Advance/Decline Line gained 7455 units vs. a gain of 12345 units in November while the number of new 52-week highs surpassed the new lows on all 22 sessions. The breadth at the NASDAQ was also positive as the A/D line gained 6237 units vs. a gain 12166 units in November, 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 decreased during the period to 81.8% from 83.3% while those above their 200-day increased to 89.3% vs. 87.3% from the previous month. Readings above 70.0% denote an overbought condition. Oil posted a strong gain for the month and finished at $48.42 (+6.79%) for the February contract while Gold was up by +7.09%.

 

 

SENTIMENT INDEX: Negative

The Sentiment Index for the month ending 12/31/20 is Negative at -3, up 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 (0.63 vs. 0.60) is Bullish. NYSE short interest was down -0.0% and 3.6 days of average volume for the period ending 12/15/20 vs. being down -0.9% and 3.8 days average volume to cover at the end of November. Short interest at the NASDAQ was up +1.1% and 1.8 days of average volume mid-December vs. a -1.2% decrease and 2.1 days average volume to cover on 11/30/20.  The VIX, a measurement of fear in the market, (22.75 vs. 20.84), NAAIM Exposure Index (83.0 vs. 106.7), and Fear and Greed Index (53.40 vs. 81.80) are Neutral. The Bullish-Bearish Investment Advisors Ratio (3.7 vs. 3.8), Percentage of Bullish Investment Advisors (62.4% vs. 64.6%), Percentage of Bearish Investment Advisors (16.8% vs. 17.2%), AAII Bull-Bear Ratio (1.7 vs. 1.7), and Total Put/Call Ratio (0.86 vs. 0.69) 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 11/13/2020 (DJIA – 29479.81). The Market Posture is expected to remain bullish through the end of January 2021. 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
12/31/2020  Stock reached new 52 week high of 306.29Bullish
12/28/2020  Price gap upBullish
12/24/2020  Relative Strength turned bearishBearish
12/08/2020  MACD ST turned bearishBearish
12/04/2020  Point & Figure Double Top breakoutBullish
11/16/2020  Up/Down slope turned upBullish
11/13/2020  50 day SMA slope turned upBullish
11/12/2020  10 day SMA cross above 21 day SMABullish
11/09/2020  21 day SMA slope turned upBullish
11/09/2020  200 day SMA slope turned upBullish
10/22/2020  21 day SMA cross above 50 day SMABullish
10/19/2020  MACD LT turned bearishBearish

**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: 26143 - Support - The 10/30/2020 low
DJIA: 30637 - Resistance - The 12/31/2020 high
DJIA: 29305 - 50-day simple moving average
DJIA: 26724 - 200-day simple moving average

S&P 500: 3233 - Support - the 10/30/2020 low
S&P 500: 3760 - Resistance - 12/31/2020 high
S&P 500: 3585 - 50-day simple moving average
S&P 500: 3234 - 200-day simple moving average

NASDAQ: 10822 - Support - the 11/9/2020 low
NASDAQ: 12902 - Resistance - the 12/23/2020 high
NASDAQ: 12078 - 50-day simple moving average
NASDAQ: 10517 - 200-day simple moving average

 

 

 

ETF Center: The top performing ETF categories for the month ending 12/30/20 were: International-Emerging (+2.20%), Commodity-Agriculture (+1.45%, Commodity-Precious Metals (+1.37%), International-Developing (+1.36%) and Sector-Internet (+1.35%). The weakest categories were: Commodity-Base Metals (-1.80%), Growth-Small Cap (-1.74%), Blend-Small Cap (-1.41%), Growth-Mid Cap (-1.38%) and Sector-Alternative Energy (-1.00%). To review all the categories in the Market Edge universe, click on the ETFs tab.

 

Industry Group Rankings: What's Hot (69) What’s Not (22)

Of the 91 Industry Groups that we track, 69 are rated as either Strong or Improving while 22 are regarded as Weak or Deteriorating. The previous month’s totals were 44-47. The following are the strongest and weakest groups for the period ending 12/30/20. Strongest: Aluminum, Automobile Mfg., Semiconductor's & Related and Diversified Mining. Weakest: Home Construction, Precious Metals, Household Products (Non-Durable) and Internet-Retail. 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
3
As of: 11/13/2020
As of: 01/22/2020
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Second Opinion Performance

Second Opinion Status

3141

Current Opinions
As of: 01/22/2021

91%

Long Accuracy
As of: 01/22/2021

57%

Avoid Accuracy
As of: 01/22/2021
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Market Recap - 01/22/2021

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 13543.06 12.14 0.09% 5.08%
DJ UTILITIES 857.94 0.04 0% -0.77%
DJ TRANSPORT 12856.54 -42.52 -0.33% 2.79%
DJ INDUSTRIALS 30996.98 -179 -0.57% 1.27%
NYSE COMPOSITE 14951.84 -67.21 -0.45% 2.94%
S & P 100 INDEX 1764.21 -2.65 -0.15% 2.54%
RUSSELL 2000 2168.76 27.34 1.28% 9.81%
S&P 500 3841.47 -11.6 -0.3% 2.27%
CBOE MKT VOLATILITY 21.91 0.59 2.77% -3.69%
AMEX COMPOSITE 2500.31 -18.53 -0.74% 5.9%
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