MARKET REVIEW – MAY 2020

The major averages struggled and traded in a narrow range as the month of May got underway as investors grappled with dismal economic data and a spike in New Jobless Claims. The NASDAQ was the exception however, as big cap technology names Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA) and Amazon (AMZN) powered the tech heavy index to a six-day win streak and a new recovery high. However, equities took a pause mid-month after Fed Chair Jerome Powell said he saw an extended period of weakness in the economy and was immediately followed by cautious commentary by renown investors, David Tepper and Stanley Druckenmiller that the stock market may be the most overvalued since 2000. The Dow suffered a 3-day losing streak on that news and turned in its worst weekly percentage loss since March as it lost -1083.35 points (-4.5%) and the blue chip index traded down to its 50-day moving average before bouncing back. A combination of a potential vaccine from Moderna (MRNA), strong language from Fed Chair Powell issuing a statement that the Federal Reserve is prepared “to do whatever it takes” to prop up the US economy and a recovery in oil prices saw the major averages recoup the losses with the DJIA spiking 911.95-points (+3.9%) on 5/18/20 on the vaccine hopes. Tensions between the US and China flared up again late in May after Congress passed a Chinese Company Oversight Bill related to an inquiry of business practices by Huawei and China passed a National Security Law to reign in autonomy in Hong Kong. That was offset however, by better than expected earnings and Central Banks of Japan and Europe passing more stimulus measures as more states and countries reopened their economies. That pushed the major averages higher for a third time in four weeks and the S&P 500 and NASDAQ finished the month at new recovery highs.

The move higher for the different indexes was broad based in May and every sector was positive, led by Communication Services (XLC), Technology (XLK), Basic Materials (XLB) and Consumer Discretionary (XLY). Energy (XLE), Financials (XLF) and Consumer Staples (XLP) lagged. In addition, as the month ended, every Industry Group covered by Market Edge Research was rated either Strong or Improving showing the diversity of the rally. The DJIA finished the period with solid gains as it finished up 1037.39 points (+4.26%) and settled at 25383.11. The S&P 500 has now bounced up roughly 38% from its March low and is only 10% away from its February all-time high as it surged 131.88 points (+4.53%) to close at 3044.31. Finally, the DJ Transportation Index was the biggest percentage gainer as it ended May up 592.71 points (+7.08%) closing at 8969.79.

The tech laden NASDAQ ended May positive for the year as biotech’s and semiconductors moved sharply during the month. The iShares NASDAQ Biotechnology ETF (IBB) punched new all-time highs led by gains in Moderna (MRNA), Regeneron (REGN) and Alexion Pharmaceuticals (ALXN), as it gained +8.66% for the month. The Philadelphia Semiconductor Index (SOX) did not lag far behind as advances by Nvidia (NVDA) and Marvell Technology (MRVL) took the index higher by +7.00% for the timeframe. For the period, the NASDAQ jumped 600.32 points (+6.75%) and settled at 9489.87. The NASDAQ index finished within 400 points of its all-time high set in February. The small cap Russell 2000 moved up 83.38 points (+6.36%) and finished at 1394.04.

MARKET OUTLOOK

The technical condition of the market improved in May. The major averages were able to post new recovery highs as the period ended and several indexes were able to break through significant resistance levels the last week of the month. The technical indicators for the indexes moved higher and were firmly in bullish ground and momentum, as measured by the 14-day RSI, was positive across the board. The DJIA was able to find support at its 50-day moving average (MA) twice in May and along with the Russell 2000 had its sights on a rising 200-day MA which would be another positive for the market. The S&P 500, NASDAQ and NASDAQ 100 were all trading above their respective 200-day MA. The different sectors were also back above their 50-day MA with Technology (XLK), Communication Services (XLC), Consumer Discretionary (XLY), Healthcare (XLV) and Materials (XLB) all back their 200-day MA. The last half of May we saw a rotation of sorts out of the ‘stay at home’ and some big cap tech names that had recovered all of their losses from the selloff and back into ‘risk on’ airlines, casinos, cruise lines and even restaurants were sharply higher the last two weeks. Amazon (AMZN), Facebook (FB), Alphabet (GOOGL) and NVIDIA (NVDA) all hit record highs in May. Breadth was positive with the NYSE and NASDAQ Advance/Decline Lines, which are leading indicators of market direction, showing broad accumulation in the rally. In addition, we saw volume increase as the S&P 500 broke through 3,000 indicating that short sellers were covering positions. New 52-week highs outpaced new lows on all but three sessions on the NYSE and two on the NASDAQ.

The strength of the snap back rally has analysts now calling for a V-shaped recovery for the economy and the stock market and it’s hard to argue with that at this point. Almost every state in the US was at some stage of reopening as May ended and the stock market is a forward looking enigma. Investors have been able to mostly move on from the Covid-19 pandemic and continue to count on a vaccine to be developed sooner than later. That will hasten a recovery and barring a mutated second outbreak of the coronavirus, hopefully have global economies and the world returning to some form of normalcy soon. However, with increasing tensions between China and US now taking center stage and the market overbought by just about any measure, it's likely the easy money has been made and there is still the possibility of a June swoon. The S&P Short Range Oscillator finished Friday at +8.41% which historically as signaled a near term top in the stock market. Look for some backing and filling as we trek into June as the major averages work off that overbought condition or, we get a new catalyst to move prices higher.

CYCLICAL TREND INDEX (CTI): Positive

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

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: Neutral

As of the close on 5/31/20, the Momentum Index is Neutral at +3, up 5 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: +31.9%

The broader market indexes are up on average +31.9% from their March 2020 closing lows vs. +36.5% for the DJIA resulting in the Neutral +3 reading. Breadth was positive during the month at the NYSE as the Advance/Decline Line gained 3360 units vs. a loss of 7043 units in April while the number of new 52-week highs surpassed the new lows on 16 out of 19 sessions, with one session being even. The breadth at the NASDAQ was also strong as the A/D line gained 2654 units after gaining 6939 units in April, while the number of new highs surpassed the new lows on 17 out of 19 sessions, with one session being even. Finally, the percentage of NYSE stocks above their 50-day moving average surged during the period to 89.4% from 27.3% while those above their 200-day increased to 32.5% vs. 17.1% from the previous month. Readings above 70.0% denote an overbought condition. Oil regained its footing following its worst month ever and finished at $35.32 (+73.2%) for the July contract while Gold was up moderately by +1.72%.

SENTIMENT INDEX: Neutral

The Sentiment Index for the month ending 5/31/20 is Neutral at 0, down 4 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 (0.54 vs. 0.56), AAII Bull-Bear Ratio (0.8 vs. 0.7) are Bullish. NYSE short interest was up +1.7% for the period ending 5/15/20 vs. being down -0.6% at the end of April. Short interest at the NASDAQ was up +3.2% mid-May vs. a -0.1% decrease on 4/30/20. The NAAIM Exposure Index (81.7 vs. 78.5), Fear and Greed Index (51.4 vs. 43.2), Bullish Investment Advisors (50.5% vs. 46.6%)  Percentage of Bearish Investment Advisors (23.8% vs. 29.1%), Bullish-Bearish Investment Advisors Ratio (2.1 vs. 1.6) and VIX, a measurement of fear in the market, (27.51 vs. 31.50) are Neutral. The Total Put/Call Ratio (0.91 vs. 1.04) is 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. 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: 22789 - Support - The 05/14/2020 low
DJIA: 27102 - Resistance - The 03/04/2020 high
DJIA: 23252 - 50-day simple moving average
DJIA: 26294 - 200-day simple moving average

S&P 500: 2766 - Support - the 5/14/2020 low
S&P 500: 3136 - Resistance - 3/3/2020 high
S&P 500: 2772 - 50-day simple moving average
S&P 500: 3001 - 200-day simple moving average

NASDAQ: 8537 - Support - the 5/4/2020 low
NASDAQ: 9838 - Resistance - the 02/19/2020 high
NASDAQ: 8451 - 50-day simple moving average
NASDAQ: 8524 - 200-day simple moving average

ETF Center: The top performing ETF categories for the month ending 5/29/20 were: Sector-Financial (+8.90%), Sector-Industrial (+6.77%), Blend-Small Cap (+5.89%), Value-Small Cap (+5.70%) and Sector-Real Estate (+5.64%). The weakest categories were: Shorts (-5.99%), Bond-Government Long Term (-1.37%), Commodity-Energy (-1.37%), Commodity-Base Metals (-0.62%) and Commodity-Precious Metals (-0.52%). To review all the categories in the Market Edge universe, click on the ETFs tab.

Industry Group Rankings: What's Hot (91) – What’s Not (0)

Of the 91 Industry Groups that we track, 91 are rated as either Strong or Improving while 0 are regarded as Weak or Deteriorating. The previous month’s totals were 57-34. The following are the strongest and weakest groups for the period ending 5/29/20. Strongest: Casinos, Home Construction, Semiconductor's & Related and Other Recreation. Weakest: Savings & Loans, Water Utilities, Retail-Drug Based and Electric Utilities. 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.