MARKET REVIEW – SEPTEMBER 2020

Historically, the month of August has not been kind to investors, but this year’s post-Covid recovery has dispelled that notion as the S&P 500 just reeled off its best August performance in over 30 years as upbeat economic data, better than expected earnings and hopes for a Covid-19 vaccine served as a catalyst for the rally. The horses were off to the races to begin the month as the NASDAQ led the charge on a seven-session win streak (+5.36%) led by Microsoft (MSFT) after announcing plans to buy Chinese social media company, TikTok. The tech heavy NASDAQ stepped higher into record territory and punched 13 all-time highs in August, while only trading lower on six sessions. The S&P 500 recovered all of the March selloff and surged to a series of record highs as the month was ending. The market took a much-needed breather mid-month as a stalemate in Congress on the second pandemic relief bill and trade tensions between the US and China flared after the President blackballed some Chinese internet companies. The slowdown allowed the market to work off its overbought condition before taking another fresh leg up as E-Commerce sales and strong housing market sent shares of Home Depot (HD), Lowe’s (LOW), Target (TGT) and Walmart (WMT) to new highs after reporting blowout earnings. In addition, the iShares Home Construction ETF (ITB) also hit a new high after Home Builders Sentiment jumped to 78, its highest level since 1998. Investors also piled back into cyclical stocks in August with casinos, airlines, and hotel stocks joining the rally. The DJ Transportation Index soared +11.91% with United Parcel Services (UPS), FedEx (FDX) and Expeditors (EXPD) leading the gains. The August FOMC Meeting left rates unchanged as expected, but Fed Chair Jerome Powell announced a change in policy at the Jackson Hole symposium that the Federal Reserve would focus on lower employment rather than inflation. The ‘Fed Put’ provided a tailwind for stocks as it promised lower rates until the economy was strong enough to get people back to work. The broader averages responded with the Dow surging +2.6% and the NASDAQ another +3.4% the last week of the month. The market gains were widespread in August with only Energy (XLE), Utilities (XLU) and REITS (XLRE) in the red, while Technology (XLK), Communication Services (XLC), Consumer Discretionary (XLY), and Industrials (XLI) outperforming, and jumping more than +9% and hit all-time highs. The DJIA notched its sixth consecutive monthly gain from the March collapse as it climbed 2001.73 points (+7.57%) and settled at 28430.05. The S&P 500 turned in its best August since 1986 adding 229.19 points (+7.01%) to close at 3500.31.

Both the tech laden NASDAQ and NDX100 indexes continued their dominance post the March Covid-19 collapse with each on a five-week win streak as the month ended. While the FAAMG stocks hit new highs and continued to outperform, Apple Inc. (AAPL) and Tesla (TSLA) were the big winners after announcing they would split their stocks. Apple shares jumped +21.4% in August while Tesla surged a whopping +74%! Strong earnings from Amazon.com (AMZN), Facebook (FB), Alphabet (GOOGL), NVIDIA (NVDA) and Microsoft (MSFT) sent the NASDAQ closer to the 12,000 mark as the period ended. The Philadelphia Semiconductor Index (SOX) surged more than 5.8% for a fourth consecutive month led by gains in Advanced Micro Devices (AMD), NVIDIA (NVDA), Lam Research (LRCX) and Qualcomm (QCOM), which surged to new highs. For the period, the NASDAQ jumped 1030.19 points (+9.59%) and finished off its best August since 2000 at 11775.46. The small cap Russell 2000 capped another solid month adding 81.45 points (+5.50%) and finished at 1561.88.

MARKET OUTLOOK

The technical condition of the market improved during August, but the rally left the major averages in an overbought condition. The technical indicators were in bullish ground but stochastics were in the 90's and the 14-day RSI for the different indexes moved into the 70's. Both these levels are unsustainable and should lead to some profit taking by traders in September. The S&P 500 close out the month +13.8% above its 200-day moving average (MA) and that is the furthest this index has been stretched since the week ending January 26, 2018. Although some backing and filling is needed to work off the overbought condition, low interest rates and hopes for a Covid-19 vaccine should keep the uptrend intact. Strength in the DJ Transportation Index, which outperformed and hit a new recovery high as the month ended is a positive for the broader market going forward. Another positive is that Technology, Communication Services, Consumer Discretionary, Consumer Staples, Materials and Healthcare sectors all hit new highs in August showing broad based participation in the economy's recovery.

Breadth was positive but showed some negative divergence as there were more declining issues than advancing issues on nine of the 21 sessions. In addition, the number of new 52-week highs, especially in the NYSE remained anemic. The NYSE and NASDAQ Advance/Decline lines last hit new highs on 8/12/20 and market technicians consider these to be leading indicators of market direction. Volume also failed to confirm the rising indexes as weekly volume was off about 25% during the month. Offsetting that negative for now however is a pickup in the proprietary Market Edge Strength Indexes, which measure the percentage of stocks in the indexes that are under accumulation based on certain Up/Down Volume calculations. The Strength Indexes moved higher for a third straight week as August came to an end and are in Bullish ground. This shows buying is increasing as the market works higher.

Sentiment, however, shows investors remain too complacent and raises a red flag. Goldman Sachs released a report showing that the median S&P 500 stock short interest as a percentage of market cap at the start of August was 1.8%. That's the lowest reading since the brokerage began tracking data in 2004 and far below the 15-year average of 2.4%. Furthermore, the Percentage of Bullish Advisors has been above 55% for nine of the last 10 weeks signaling that professional investors are too complacent and overly bullish. Most sentiment indicators are contrarian indicators and when everyone is too bullish, historically it has marked a near-term top in the market. The market is in need of some backing and filling to work off its overbought condition and the month of September has notoriously been volatile and one of the worst performing months for the market. Investors will also be turning their focus to the upcoming election soon and that will give the rally a reason to pause. Despite some cautious signals in the market indicators, upside momentum is likely to carry the major averages higher in September. Upside targets are now 30,250 for the DJIA and 3600 for the S&P 500.

CYCLICAL TREND INDEX (CTI): Positive

Presently the CTI is Positive at +13, up 2 units from the previous month. The counts for Cycles A, B, C, D and E are all bullish.

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

** 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 2018-2020

The following is the performance record of the Market Edge ‘Market Posture’ for 2018 - 2020

MOMENTUM INDEX: Bullish

As of the close on 8/28/20, the Momentum Index is Positive at +6, even 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: +51.5%

The broader market indexes are up on average +51.5% from their March 2020 closing lows vs. +52.9% for the DJIA resulting in the Bullish +6 reading. Breadth was positive during the month at the NYSE as the Advance/Decline Line gained 3406 units vs. a gain of 4760 units in July while the number of new 52-week highs surpassed the new lows on all 21 sessions. The breadth at the NASDAQ was also positive as the A/D line gained 1691 units after adding 998 units in July, while the number of new highs surpassed the new lows on each day. Finally, the percentage of stocks above their 50-day moving average increased during the period to 69.8% from 65.5% while those above their 200-day rose to 56.5% vs. 48.1% from the previous month. Readings above 70.0% denote an overbought condition. Oil increased and finished at $42.85 (+6.40%) for the October contract while Gold was marginally higher by +0.57%.

SENTIMENT INDEX: Negative

The Sentiment Index for the month ending 8/28/20 is Negative at -4, 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 (0.52 vs. 0.77) and the AAII Bull-Bear Ratio (0.8 vs. 0.4) are Bullish. NYSE short interest was down -2.6% and 1.6 days average volume for the period ending 8/15/20 vs. being down -3.6% and 5.9 days average volume to cover at the end of July. Short interest at the NASDAQ was down -0.6% and 2.2 days of average volume mid-August vs. a -0.6% decrease and 2.1 days average volume to cover on 7/31/20. VIX, a measurement of fear in the market, (22.96 vs. 24.46) and the Fear and Greed Index (73.6 vs. 63.2) are Neutral. The NAAIM Exposure Index (106.6 vs. 97.4), the Percentage of Bullish Investment Advisors (60.0% vs. 57.3%), the Percentage of Bearish Investment Advisors (16.2% vs. 17.5%), the Bullish-Bearish Investment Advisors Ratio (3.7 vs. 3.3), and the Total Put/Call Ratio (0.77 vs. 0.83) 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

**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: 25992 - Support - The 07/30/2020 low
DJIA: 29568 - Resistance - The 02/12/2020 high
DJIA: 26838 - 50-day simple moving average
DJIA: 26287 - 200-day simple moving average

S&P 500: 3200 - Support - the 7/24/2020 low
S&P 500: 3509 - Resistance - 8/28/2020 high
S&P 500: 3258 - 50-day simple moving average
S&P 500: 3082 - 200-day simple moving average

NASDAQ: 10217 - Support - the 7/24/2020 low
NASDAQ: 11730 - Resistance - the 08/27/2020 high
NASDAQ: 10688 - 50-day simple moving average
NASDAQ: 9292 - 200-day simple moving average

ETF Center: The top performing ETF categories for the week ending 8/28/20 were Sector-Financial (+4.28%), Sector-Alternative Energy (+3.93%), Sector-Internet (+3.84%), Growth-Large Cap (+2.97%) and Sector-Telecom (+2.88%). The weakest categories were: Bond-Government Long Term (-2.40%), Shorts (-2.27%), Bond-International (-1.04%) and Bond-Multisector Aggregate (-0.81%). To review all the categories in the Market Edge universe, click on the ETFs tab.

Industry Group Rankings: What's Hot (57) – What’s Not (34)

Of the 91 Industry Groups that we track, 57 are rated as either Strong or Improving while 34 are regarded as Weak or Deteriorating. The previous month’s totals were 82-9. The following are the strongest and weakest groups for the period ending 8/28/20. Strongest: Casinos, Other Recreation, Automobile Mfg. and Internet-Retail. Weakest: Savings & Loans, Medical/Biotechnology, Oilfield-Integrated Majors and Oil-Secondary. 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.