MARKET REVIEW – NOVEMBER 2020

The terrain remained rugged during the month of October as mixed earnings and improving economic data could not shake off the surge of coronavirus infections, uncertainty in the upcoming election, and increased global restrictions and lockdowns that is stalling the current recovery. The period got off to a strong start as the major averages snapped a four-week consecutive losing streak, dating back to the beginning of September, as the Dow gained 1055.82-points (+3.8%), while the NASDAQ surged +6.3% as investors banked on a second coronavirus stimulus package to shore up the economy. Leadership could be seen in the DJ Transportation Index posting new all-time highs on five sessions during the first half of the month and the small cap Russell 2000 hitting a new recovery high. However, a breakdown in negotiations had investors throwing in the towel on the reopening trade as casinos, airlines, cruise lines, restaurants and hotels were hit hard as October wrapped up. The month ended with the major averages posting their worst weekly performance since March and the VIX, climbed to the 40 handle, which was its highest reading since June. The October selloff was broad based and only the Utilities (XLU) sector was able to finish in the plus column, while Technology (XLK), Energy (XLE), Health Care (XLV) and REITs (XLRE) were all down more than +3% for the month. Crude oil prices dipped as demand fell and ended around $35 barrel price, which was the lowest level since late May and Gold was lower as the US Dollar firmed. Yields rose and the yield on the 10-year Treasury closed at 0.89%, its highest level since early June.  The DJIA posted its second consecutive monthly loss, as it was down 1280.10 points (-4.61%) and settled at 26501.60 while the S&P 500 tumbled -93.04 points (-2.77%). Finally, the DJ Transportation Index, which had a strong start to the month, ended in negative territory as it lost better than 123.53 points (-1.10%).

The tech laden NASDAQ and NASDAQ 100 also fell victim to the second half selloff as disappointing earnings and forward guidance by FAANG names and the lack of stimulus saw the indexes flirt with their September lows. The Philadelphia Semiconductor Index (SOX) managed to eke out a gain, while the NASDAQ Biotechnology ETF was burdened by delays of a virus to combat Coronavirus and fell -3.54% for the month. The small cap Russell 2000 outperformed and managed to post positive for the month, gaining 30.79 points (+2.04%) and finished at 1538.48. The NASDAQ however, lost 255.92 points (-2.29%) and finished at 10911.59.

MARKET OUTLOOK

The technical condition of the market deteriorated last month as the major averages turned in their biggest losses since the March selloff. The technical indicators for the different indexes are firmly in negative ground and momentum, as measured by the 14-day RSI, is negative and below 40. MACD is negative and confirms the bearish short-term trend. Key moving average (MA) support levels came into play. As October ended the DJIA traded down to its 200-day MA at 26199 for the first time since July but found support. If weakness remains after the election, the next support level would be the 38.2% retracement of the move from the March low to the October high at 24979. The S&P 500 broke below its 100-day MA and next support is around 3120, which ties in the 200-day MA and the September low. The NASDAQ struggled to hold support at its 100-day MA at 10891 and if the September low comes into play, support would be 10520. The DJ Transportation Index and small cap Russell 2000, which had been showing positive divergence and outperforming, fell with the broader market but stayed above support at their respective 100-day MA. The market ended the week oversold however, with stochastics below 20 and the S&P Short Range Oscillator (SRO) at -5.85%, which could lead to a bounce to start the week.

Market breadth was also showing deterioration as both the NYSE and NASDAQ were showing newer 52-week lows than new highs as October was ending for the first time since April. The NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, continue to show stocks are under distribution. The NYSE A/D line last put in a new high on 10/12/20. Investor sentiment slipped back into Neutral, but the Percentage of Bullish Advisors hit its highest mark since the first week of September and according to FINRA, margin accounts were at their highest levels since September 2018. In addition, bearish advisors are hard to find and the Bull/Bear Ratio, the difference between Bullish and Bearish Advisors, is at 40.1. That’s also the highest reading since the first week of September and is a sign of a market top.

Investors hoping for a stimulus package to help the economy weather the coronavirus slow down were disappointed as the month ended and with the uncertainty of next week's election and looming lockdowns in Europe, the bulls may need a few weeks to regroup. However, with economic data and earnings improving, record low interest rates and hopes for a stimulus package sometime after the election, the major averages should be able to stay above their 200-day MA's and settle with a 10% correction. That could mean that most of the selling we saw at the end of the month is behind us. Finally, November is the start of the best six months of the year for the market. Once we get past the election, the major averages should surprise and if there’s progress on a Covid-19 vaccine and another stimulus package, we should get a rally towards the old highs to close an abysmal 2020!

A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers.

CYCLICAL TREND INDEX (CTI): Negative

Presently the CTI is Negative -2, down 9 units from the previous month. The counts for Cycles A, B, C are bearish while the counts for Cycles D and E are bullish.

The following are projected CTI readings through the week ending 11/27/20. 

** 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 10/30/20, the Momentum Index is Neutral at -2, down six 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: -6.9%

The broader market indexes are down on average -6.9% from their October 2020 closing highs vs. -8.1% for the DJIA resulting in the Neutral -2 reading. Breadth was mixed during the month at the NYSE as the Advance/Decline Line lost 371 units vs. a loss of 3863 units in September while the number of new 52-week highs surpassed the new lows on 17 out of 22 sessions. The breadth at the NASDAQ was also mixed as the A/D line lost 1614 units after dropping 4790 units in September, while the number of new highs surpassed the new lows on 17 out of 22 sessions. Finally, the percentage of stocks above their 50-day moving average increased during the period to 35.9% from 20.8%, while those above their 200-day rose to 51.2% vs. 43.9% from the previous month. Readings above 70.0% denote an overbought condition. Oil posted a loss for the month and finished at $35.72 (-11.18%) for the December contract while Gold was marginally down by -0.46%.

SENTIMENT INDEX: Neutral

The Sentiment Index for the month ending 10/30/20 is Neutral at 0, down a notch 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. 0.57) and the VIX, a measurement of fear in the market, (38.02 vs. 26.38) are Bullish. NYSE short interest was down -0.9% and 2.8 days of average volume for the period ending 10/15/20 vs. being down -0.1% and 3.1 days average volume to cover at the end of September. Short interest at the NASDAQ was down -1.9% and 2.5 days of average volume at the end of September vs. a +3.0% increase and 2.5 days average volume to cover on 9/30/20. AAII Bull-Bear Ratio (1.1 vs. 0.5), Total Put/Call Ratio (1.02 vs. 0.87), the Fear and Greed Index (46.0 vs. 49.8) and NAAIM Exposure Index (77.9 vs. 55.3) are Neutral. The Bullish-Bearish Investment Advisors Ratio (3.0 vs. 2.7), Percentage of Bullish Investment Advisors (60.6% vs. 51.5%), and the Percentage of Bearish Investment Advisors (20.2% vs. 19.4%) 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 10/30/2020 (DJIA – 26501.60). The Market Posture is expected to remain bearish into December. 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: 26537 - Support - The 09/24/2020 low
DJIA: 29568 - Resistance - The 02/12/2020 high
DJIA: 28021 - 50-day simple moving average
DJIA: 26251 - 200-day simple moving average

S&P 500: 3209 - Support - the 9/24/2020 low
S&P 500: 3588 - Resistance - 9/2/2020 high
S&P 500: 3399 - 50-day simple moving average
S&P 500: 3123 - 200-day simple moving average

NASDAQ: 10520 - Support - the 9/24/2020 low
NASDAQ: 12074 - Resistance - the 09/2/2020 high
NASDAQ: 11303 - 50-day simple moving average
NASDAQ: 9784 - 200-day simple moving average

ETF Center: The top performing ETF categories for the month ending 10/30/20 were Shorts (+3.33%), Specialty Utilities (+2.22) and Specialty Communications (+0.48%). The weakest categories were: Specialty Real-Estate (-8.61%), Europe (-5.73%), Specialty Retail (-2.97%), Blend Large-Cap (-2.83%) and Specialty Health (-2.62%). To review all the categories in the Market Edge universe, click on the ETFs tab.

Industry Group Rankings: What's Hot (44) – What’s Not (47)

Of the 91 Industry Groups that we track, 44 are rated as either Strong or Improving while 47 are regarded as Weak or Deteriorating. The previous month’s totals were 33 -58. The following are the strongest and weakest groups for the period ending 10/30/20. Strongest: Industrial Technology, Semiconductor's & Related, Advertising and Footwear. Weakest: Oilfield-Integrated Majors, Oilfield-Drilling and Oilfield-Equipment 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.