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Will February Cool Off the Bull?

On The Edge (Monthly)

February 02, 2021
ON THE EDGE

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Will February Cool Off the Bull?
Negative CTI suggests stocks could stuggle as rally stalls.

MARKET REVIEW – FEBRUARY 2021

 

Following a year whereby stocks largely ignored headlines and surged higher, January threw up a caution flag to market participants that some amount of consolidation was needed in the face of a still persistent Covid-19 overhang. After traders took profits on the first day of trading to start the year, the major averages powered to new record highs across the board with the DJIA crossing 31,000. Pressure on Congress to pass another stimulus bill with incoming Treasury Secretary Janet Yellen urging Congress to ‘act big’, kept investor sentiment bullish. From there, mixed economic indicators, coupled with rising political turmoil saw the broader indexes consolidate recent gains led by a decline in big technology and FANNG stocks. As earnings season kicked off, better than expected numbers reignited tech and Apple (AAPL), Facebook (FB), Microsoft (MSFT) and Broadcom (AVGO) led the NASDAQ back to fresh new highs. A five-session win streak led to the NASDAQ posting a gain of 637.49 points (+4.8%) and a series of new highs. Volatile trading proceeded as January was ending and whipped the major averages higher and lower as retail investors discovered the art of the ‘Short Squeeze’ sending shares of GameStop (GME), AMC Holdings (AMC), Bed, Bath & Beyond (BBBY) and others, skyrocketing to insane valuations. Hedge funds were forced to liquidate positions to cover losses and the broader indexes posted their worst week since October. The VIX climbed as high as 36.33, a level not hit since October’s selloff.  With delays in stimulus, shortfalls in Covid-19 vaccines, and mixed economic data building up, the DJIA and S&P 500 index gave up all the gains from the start of the year and finished in negative territory for their first monthly loss since October. A weak US Dollar helped boost commodity prices during the month and foreign markets and the iShares Emerging Markets (EEM) recorded new highs before consolidating as January closed.  The sectors finished mixed in January with Energy (XLE), Healthcare (XLV), Consumer Discretionary (XLY) and Real Estate (XLRE) doing the heavy lifting, while Consumer Staples (XLP), Industrials (XLI), and Basic Materials (XLB) and Financials (XLF) were laggards. For the month, the DJIA finished lower by 623.86 points (-2.04%) and settled back below 30,000 at 29928.62. The S&P 500 was also down for the period by 41.83 points (-1.11%), finishing at 3714.24. The DJ Transportation Index fell 418.94 points (-3.35%) and settled at 12087.99.

 

The tech laden NASDAQ and NDX 100 indexes were outliers in an otherwise weak month as investors continued to be concerned about the timeframe for when the U.S. can get past the Covid-19 outbreak. Investors held on to stay-at-home stocks and looked to big technology names with reliable earnings. The Philadelphia Semiconductor Index (SOX), which was buoyed by gains in Broadcom (AVGO), Applied Materials (AMAT) and Taiwan Semiconductor (TSM)  was up +3.28%, while the NASDAQ Biotechnology ETF(IBB) outperformed jumping 6.04%, posting new all-times highs on ten sessions. For the period, the NASDAQ posted six new all-time highs and gained 182.41 points (+1.42%) ending at 13070.69. Finally, the small cap Russell 2000 enjoyed another robust month as it climbed 98.78 points (+5.00%) to finish higher for a fourth consecutive month at 2073.64.

 

MARKET OUTLOOK

The technical condition of the market deteriorated as the month ended as several of the major averages gave back all of 2021's gains. The technical indicators ticked lower with MACD ST, which gauges the short-term trend, sliding into Bearish ground for the different indexes and Momentum, as measured by the 14-day RSI, in negative to neutral ground. The DJIA and DJ Transportation Index dropped below their 50-day MA, while the S&P 500 finished January sitting on that key support level. The NASDAQ, Russell 2000 and Philly Semiconductor Index fell to their respective 30-day MA before finding support. Negative divergence was appearing in the charts as the month ended with the Philly Semiconductor Index off -8.0% from its record high from 1/21/21 and the DJ Transportation Index down -8.5% from its 1/14/21 record high. These indexes, along with the small cap Russell 2000, tend to be market leaders, both up and down, and could be signaling that the rally off the March lows could stall without additional stimulus and delays in distributing the Covid-19 vaccine.

 

Underlying breadth was also deteriorating as January closed with new 52-week highs contracting significantly and the NYSE and NASDAQ Advance/Decline lines negative the last week of the month. Investor sentiment, which by some measures had touched extreme levels as the year began, was reined in over the last few weeks but the Percentage of Bullish Investment Advisors has been above 60% for 10 consecutive weeks, a red flag for excess bullishness. The major averages look poised to start February with a bounce, but it's likely we will see what could be a 5-7% pullback over the next few weeks. The small cap Russell 2000 had surged +40% since the first of November and the NASDAQ had rallied 24% and both are overdue for some consolidation. A healthy market is going to go through periods of strength and weakness and with the Market Edge Cyclical Trend Index (CTI) projected to move into negative ground we are most likely in for a few weeks of back and forth trading to consolidate those gains until we see more progress in applying vaccines and getting more businesses to reopen. Keep an eye on 3700-3710 on the S&P 500 as an area of support. A break below that support level could induce more selling leaving 3580-3600 as a downside target for the bellwether index,

 

 

CYCLICAL TREND INDEX (CTI): Positive

Presently the CTI is Positive at +2, down 7 units from the previous month. The counts for Cycle A, C, D, and E are bullish while Cycle B is bearish.

 

 

Cycle

Average # Of Weeks

In The Cycle

# Of Weeks Since

Previous Bottom

Bullish Or Bearish

Connotation

A

6 +  or    -1 Week

2 Weeks

Bullish

B

18+  or    -2 Weeks

13 Weeks

Bearish

C

36+  or    -4 Weeks

13 Weeks

Bullish

D

72 + or    -7 Weeks

44 Weeks

Bullish

E

216 + or   -20 Weeks

44 Weeks

Bullish

 

 

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

 

Week Ending

CTI

Connotation

1/29/21 (Actual)

3

Bullish

2/05/21 (Projected)

2

Bullish

2/12/21 (Projected)

0

Bearish

2/19/21 (Projected)

0

Bearish

2/26/21 (Projected)

0

Bearish

 

 

** 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 2019-2021

The following is the performance record of the Market Edge ‘Market Posture’ for 2019 - 2021

 

Projected Strong Periods:

 

Actual Results – DJIA

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

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

10/23/20  - 11/13/20  (28335.57 – 29479.81)

DJIA Gain/Loss

+1144.24

 

 

MOMENTUM INDEX: Positive

As of the close on 1/31/21, 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

1/31/21

29982.62

12087.99

3714.24

14397.20

2073.64

13070.69

852.40

+500531

%Change

+13.1%

+10.4%

+13.6%

+16.0%

+34.8%

+19.8%

-0.6%

+4.2%

 

 

Average % Change of the Broad Market Indices: +14.4%

 

The broader market indexes are up on average +14.4% from their October 2020 closing lows vs. +13.1% for the DJIA resulting in the Bullish +4 reading. Breadth was positive during the month at the NYSE as the Advance/Decline Line gained 160 units vs. a gain of 7455 units in December while the number of new 52-week highs surpassed the new lows on all 19 sessions. The breadth at the NASDAQ was also positive as the A/D line gained 2357 units vs. a gain 6237 units in December, while the number of new highs surpassed the new lows on all 19 sessions. Finally, the percentage of stocks above their 50-day moving average decreased during the period to 66.2% from 81.8% while those above their 200-day decreased to 88.8% vs. 89.3% from the previous month. Readings above 70.0% denote an overbought condition. Oil posted a gain for the month and finished at $52.20 (+7.58%) for the March contract while Gold was down by +2.42%.

 

 

SENTIMENT INDEX: Negative

The Sentiment Index for the month ending 1/31/21 is Negative at -1, 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 (0.48 vs. 0.63) and VIX, a measurement of fear in the market, (33.09 vs. 22.75), are Bullish. NYSE short interest was down -2.8% and 3.0 days of average volume for the period ending 1/15/21 vs. being down -1.7% and 3.0 days average volume to cover at the end of December. Short interest at the NASDAQ was up 0.4% and 1.7 days of average volume mid-January vs. a +4.0% increase and 1.9 days average volume to cover on 12/31/20. NAAIM Exposure Index (83.5 vs. 83.0), AAII Bull-Bear Ratio (1.0 vs. 1.7) and Fear and Greed Index (52.20 vs. 53.40) are Neutral. The Bullish-Bearish Investment Advisors Ratio (3.7 vs. 3.7), Percentage of Bullish Investment Advisors (61.2% vs. 62.4%), Percentage of Bearish Investment Advisors (16.5% vs. 16.8%), and Total Put/Call Ratio (0.82 vs. 0.86) 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 – 29410.00). The Market Posture is expected to remain bullish through the end of mid-February 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
01/29/2021  10 day SMA cross below 21 day SMABearish
01/29/2021  21 day SMA slope turned downBearish
01/29/2021  50 day SMA slope turned downBearish
01/27/2021  Price gap downBearish
01/27/2021  MACD LT turned bearishBearish
01/22/2021  Relative Strength turned bearishBearish
01/21/2021  Stock reached new 52 week high of 312.71Bullish
01/15/2021  MACD ST turned bearishBearish
01/06/2021  Point & Figure Double Top breakoutBullish
11/16/2020  Up/Down slope turned upBullish
11/09/2020  200 day SMA slope turned upBullish

**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: 28902 - Support - The 11/12/2020 low
DJIA: 31272 - Resistance - The 01/21/2021 high
DJIA: 30209 - 50-day simple moving average
DJIA: 27405 - 200-day simple moving average

S&P 500: 3233 - Support - the 10/30/2020 low
S&P 500: 3861 - Resistance - 01/21/2021 high
S&P 500: 3694 - 50-day simple moving average
S&P 500: 3324 - 200-day simple moving average

NASDAQ: 10822 - Support - the 10/30/2020 low
NASDAQ: 13560 - Resistance - the 01/21/2021 high
NASDAQ: 12557 - 50-day simple moving average
NASDAQ: 10913 - 200-day simple moving average

 

 

 

ETF Center: The top performing ETF categories for the month ending 1/31/21 were: Shorts (+2.94%), Commodity-Agriculture (+1.35%), Commodity-Energy (+1.29%), Sector-Consumer Staples (+0.84%) and Commodity-Blend (+0.82%). The weakest categories were: Sector-Alternative Energy (-5.92%), Blend-Small Cap (-4.15%), Sector-Financial (-3.73%), Blend-Mid Cap (-3.16%) and Sector-Technology (-3.07%). To review all the categories in the Market Edge universe, click on the ETFs tab.

 

Industry Group Rankings: What's Hot (59) What’s Not (32)

Of the 91 Industry Groups that we track, 59 are rated as either Strong or Improving while 32 are regarded as Weak or Deteriorating. The previous month’s totals were 69-22. The following are the strongest and weakest groups for the period ending 1/31/21. Strongest: Automobile Mfg., Semiconductor's & Related, Diversified Mining and Media-Publishing. Weakest: Electric Utilities, Precious Metals, Gas Companies and Pollution Waste Management. 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
12
As of: 11/13/2020
As of: 02/12/2020
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Second Opinion Performance

Second Opinion Status

3093

Current Opinions
As of: 02/24/2021

92%

Long Accuracy
As of: 02/24/2021

50%

Avoid Accuracy
As of: 02/24/2021
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Market Recap - 02/24/2021

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 13597.97 132.77 0.99% 5.5%
DJ UTILITIES 825.65 -10.2 -1.22% -4.5%
DJ TRANSPORT 13630.55 227.44 1.7% 8.98%
DJ INDUSTRIALS 31961.86 424.51 1.35% 4.42%
NYSE COMPOSITE 15539.42 180.29 1.17% 6.98%
S & P 100 INDEX 1784.24 18.33 1.04% 3.7%
RUSSELL 2000 2284.38 53.07 2.38% 15.67%
S&P 500 3925.43 44.06 1.14% 4.5%
CBOE MKT VOLATILITY 21.34 -1.71 -7.42% -6.19%
AMEX COMPOSITE 2724.41 51.99 1.95% 15.39%
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