MARKET REVIEW – MAY 2021

The stock market continued to ride a wave of optimism as April came in with a vengeance and never looked back as the major averages surged higher during the month. An improved jobs picture, improving economic data and strong vaccine distribution led to an appetite for increased risk in big cap technology names and reopening stocks such as airlines, casinos, cruise lines and hotels. Additional news of a big jobs and infrastructure package being proposed by the Biden administration and a marginal pullback in yields on the 10-year and 30-year T-Bills pushed the DJIA, S&P 500, NASDAQ, NYSE, DJ Transportation, and NDX 100 to fresh new record highs during the month. Investors who had shunned big cap technology names earlier in the year rotated back into names like Alphabet (GOOGL), Amazon (AMZN) and Nvidia (NVDA) ahead of earnings and all soared better than +12% during the period. Helping to boost the market were comments by the Federal Reserve saying they will look past inflationary data in 2021 and keep rates low until the employment situation improves. The major averages consolidated some of their gains mid-month on news that the FDA halted Johnson & Johnson’s (JNJ) vaccine due to rare blood clots and headlines of a proposed Capital Gains Tax of 43.4% on individuals making more than $1 million. The DJIA went on to lose -700.78 points (-2.1%) while the NASDAQ declined by -279.81 points (-2.8%) during a four session stretch as first quarter earnings season got underway. Led by strong earnings from the Money Center Banks on higher yields, the major averages made a run back into record territory during the second half of the month. Weekly jobless claims fell back below 600K, which last occurred in the beginning of February 2020 before the coronavirus pandemic gripped markets. Crude oil prices rose 7.32% on strong demand, as Americans were increasingly returning to work, and closed in the $63 area. Cryptocurrency leader, Bitcoin was down about 10% for the month with momentum shifting to altcoins hitting a low around $47,000 after peaking close to $65,000 previously. All the sectors were in the green for a second consecutive month with outperformances by REIT’s (XLRE), Consumer Discretionary (XLY), Communications Services (XLC) and Technology (XLK) leading the way. Energy (XLE), Consumer Staples (XLP), Industrials (XLI), and Healthcare (XLV) were laggards but still posted solid gains. For the month, the DJIA managed to post four new all-time highs and gained 893.30 points (+2.71%) and settling at 33874.85. The S&P 500 was on fire all month long and recorded ten new all-time highs of its own and rose by 208.28 points (+5.24%), finishing at 4181.17. The DJ Transportation Index posted seven new all-time highs as it jumped 715.61 points (+4.89%) and settled at 15347.00.

The technology heavy NASDAQ and NDX 100 outperformed in April as a pullback in yields led to investors picking up beaten down big cap technology that blew away Q1 earnings estimates at a record rate. Strength in Alphabet (GOOG +16.5%), Facebook (FB + 10.3%) and Amazon (AMZN +12.7%) paced the NASDAQ rally. However, the Philadelphia Semiconductor Index (SOX) was lower by -0.51%, despite gains from bellwethers, Nvidia (NVDA) and Lam Research (LRCX) outperforming during the timeframe. The NASDAQ Biotechnology ETF (IBB) also outperformed, gaining (+2.71%) and was led by strength in Moderna (MRNA) which surged better than 36% during the month on vaccine distribution. The NASDAQ managed to record a new all-time high just once, but still managed climb up 715.81 points (+5.40%), ending at 13962.68. Finally, the small cap Russell 2000 advanced by 45.93 points (+2.07%) to finish higher for a seventh consecutive month at 2266.45.

MARKET OUTLOOK

The technical condition of the market improved during April as the major averages were able to post new record highs but ended with the different indexes consolidating their gains while trading in a narrow range. The technical indicators were mixed as the month came to a close with MACD-ST crossing into negative territory, but MACD-LT still confirming that the intermediate-term trend is bullish. Upside momentum is positive but showed signs of slowing. The exception is the DJ Transportation Index which continues to outperform and drove a 13 week win streak into May, its longest weekly win streak in 32 years. A look at the weekly charts for the major averages shows a bullish trend remains in place and prices should step higher. Underlying breadth is positive with the NYSE Advance/Decline line, which is a leading indicator of market direction, hitting several new highs as April was ending. The NASDAQ A/D line also finished positive. New 52-week highs expanded during the period showing more stocks participating in the rally. Investor sentiment, however, continues to show excessive bullishness with Bulls outnumbering Bears more than 2:1. The National Assoc. of Active Investment Managers (NAAIM) Exposure Index climbed to 103.7 as the month closed, meaning hedge funds are buying on margin, and that is the highest market exposure the professionals have had since mid-February. The DJIA dropped -3.2% and the NASDAQ -6.9% over the following two weeks. In addition, FINRA's Customer Margin Balance Form hit another record high in March of $822,551,000. While not a reason to sell, this reflects that bullish sentiment has gotten frothy and does raise a cautionary flag.

First quarter earnings are coming in strong with 84% of companies beating estimates. Not only topping consensus but beating estimates, on average, by +21.7%. With valuations rich however, it does not appear that earnings will be a catalyst for the market to move much higher. There is an old Wall Street adage that says, ‘sell in May and go away’. While the rally does appear to be getting long in the tooth, the economy is reopening and pent-up demand in consumers should keep stock prices nudging higher. Couple that with a Federal Reserve that says the economy is “a long way from employment and inflation goals”, and investors might want to reconsider and stay in May.   

CYCLICAL TREND INDEX (CTI): Positive

Presently the CTI is Positive at +3, down 5 units from the previous month. The counts for Cycles B and E are bullish, while Cycle A, C, and D are bearish.

The following are projected CTI readings through the week ending 5/28/21. 

** 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

MOMENTUM INDEX: Neutral

As of the close on 4/30/21, the Momentum Index is Neutral at +1, 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.

Average % Change of the Broad Market Indices: +12.5%

The broader market indexes are up on average +12.5% from their January 2021 closing lows vs. +13.0% for the DJIA resulting in the Neutral +1 reading. Breadth was positive during the month at the NYSE as the Advance/Decline Line gained 6745 units vs. a gain of 5109 units in March 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 1091 units vs. a gain 1351 units in March, while the number of new highs surpassed the new lows on 20 out of 21 sessions. Finally, the percentage of stocks above their 50-day moving average jumped during the period to 70.4% from 60.3% while those above their 200-day increased to 87.3% vs. 86.2% from the previous month. Readings above 70.0% denote an overbought condition.

SENTIMENT INDEX: Negative

The Sentiment Index for the month ending 4/30/21 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 (0.18 vs. 0.12) is Bullish. NYSE short interest was up +1.5% and 3.1 days of average volume for the period ending 4/15/21 vs. being up +0.0% and 3.7 days average volume to cover at the end of March. Short interest at the NASDAQ was up +2.5% and 2.3 days of average volume mid-April vs. a +4.9% increase and 1.8 days average volume to cover on 3/31/21. The Fear and Greed Index (61.0 vs. 46.4) and the VIX, a measurement of fear in the market, (18.61 vs. 19.40) are Neutral. The AAII Bull-Bear Ratio (1.7 vs. 2.0), the Percentage of Bullish Investment Advisors (59.2% vs. 54.4%), the NAAIM Exposure Index (103.7 vs. 57.5), the Percentage of Bearish Investment Advisors (16.5% vs. 17.5%), the Bullish-Bearish Investment Advisors Ratio (3.6 vs. 3.1) and the Total Put/Call Ratio (0.81 vs. 0.89) 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 May 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

***CALENDAR OF 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:      

***NUMBERS TO WATCH***

ETF Center: The top performing ETF categories for the month ending 4/30/21 were: Commodity-Agriculture, Commodity-Base Metals, Sector-Financial and Commodity-Blend. The weakest categories were: Shorts, Sector-Alternative Energy, Growth-Large Cap and Sector-Energy. 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 50-41. The following are the strongest and weakest groups for the period ending 4/30/21. Strongest: Steel, Forest Products, Home Furnishings/Appliances and Home Construction. Weakest: Automobile Manufacturing, Advertising, Beverages 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.