Story

Signs of Fatigue

On The Edge (Monthly)

MARKET REVIEW – JUNE 2021 

 

Inflation jitters caused the major averages to veer in opposite directions as the month of May got underway. Strong economic data and cautious comments from Secretary-Treasurer Janet Yellen led to a bump up in interest rates and nervous investors traded out of technology and growth stocks and into cyclical stocks. That sent the DJIA, S&P 500 and DJ Transportation Index to new record highs the first week of May and the Dow crossing above 35,000 for the first time. The rotation into cyclical shares sent the blue-chip index on a five-day win streak. The selloff in FANG and big cap tech shares sent the NASDAQ and small cap Russell 2000 in the opposite direction, eventually sliding below support at their 100-day moving average. The yield on the 10-year Treasury Bill spiked to 1.70% mid-month as market participants fretted that the Federal Reserve was falling behind the eight ball on a ‘too hot’ economy triggering broad selling across the board once again. The tumble in the NASDAQ left the tech heavy index down 782.81 points (-5.5%) on the month before Investors piled back into technology shares as May was ending but the back and forth trading wasn’t enough to erase the loss, and the NASDAQ turned in its first losing month since October. The DJIA and S&P 500 managed to hold support at their respective 50-day MA and the Dow rallied to close higher on six of the last seven sessions as interest rates retreated and Initial Jobless Claims continued to fall to new pandemic lows. Also helping to boost the different indexes mid-month was word from the CDC that vaccinated people no longer needed to wear masks or physically distance indoors or outdoors. Reopening stocks, led by gains in airlines, cruise lines, casinos and hotels were able to bounce back the latter part of the month but the sectors finished May mixed. Financials (XLF), Materials (XLB), Energy (XLE) and Industrials (XLI) outperformed, while Consumer Discretionary (XLY), Utilities (XLU), and Technology (XLK) underperformed and finished in negative territory. In the end, better news about upcoming Q2 earnings projections led to buyers coming off the sidelines but left the major averages range bound .For the month, the DJIA posted three new all-time highs and gained 654.60 points (+1.93%) and settled at 34529.45. The S&P 500 was up and down all month and managed a small gain of 22.94 points (+0.55%), finishing at 4204.11. The DJ Transportation Index posted four new all-time highs as it jumped 403.31 points (+2.63%) and settled at 15750.11.

The technology laden NASDAQ and NDX 100 underperformed during the month as a mid-month rise in yields led to a selloff in technology names across the board. Large cap names like Amazon (AMZN -6.81%) and Apple (APPL – 6.72%) disappointed investors throughout the timeframe. The NASDAQ Biotechnology ETF (IBB) also underperformed, losing (-1.74%) as Vertex Pharmaceuticals (VRT -2.27%) dragged the sector lower. However, the Philadelphia Semiconductor Index (SOX) was the lone bright spot as it moved higher by +2.5%, as Nvidia (NVDA) and Analog Devices (ADI) continued their strong YTD performances. The NASDAQ suffered its first monthly loss since October and finished down by 213.94 points (-1.53%), ending at 13748.74. Finally, the small cap Russell 2000 was able to eke out a small gain by moving up 2.52 points (+0.11%), thereby extending its win streak to eight consecutive months, as it finished at 2268.97.

 

 MARKET OUTLOOK

 

The technical condition of the market was also mixed in May as a volatile period saw the major averages climbing higher as the month ended but finished in a trading range. Early weakness in some of the technical indicators reversed course the latter part of May and Momentum, as measured by the 14-day RSI, was bullish and improving. MACD was also in positive ground confirming that the short-term trend had returned to a bullish condition. After testing key moving average support levels in May the major averages were all back above their respective 50-day moving average which bodes well for the market going forward. The small cap Russell 2000 and Philadelphia Semiconductor Index were leading the market higher as we roll into June which is also a bullish sign. Technicians would like to see small caps and Transportation stocks lead. Despite the positive signs in the market technical, there was signs of fatigue in the old bull. For one, Market Edge Industry Group Analysis started the month with 59 of the 91 Industry Groups rated Strong or Improving compared to 32 groups Weak or Deteriorating. That number had fallen to only 32 Industry Groups rated Strong or Improving as the month ended showing less market groups participating in the advance. In addition, the small cap Russell 2000 rally ran into resistance at a descending trend line at 2300 leaving the index range bound. We’ll need to see improvement in these areas if the rally is going to continue into the summer. Internal Breadth remains strong as the NYSE Advance/Decline line, a leading indicator of market direction, ended May at a new high. Furthermore, new 52-week highs were expanding on both the NYSE and NASDAQ which is a bullish condition. Investor Sentiment declined from frothy levels early in the month which could also benefit the bulls. Investor's Intelligence shows an increase in the Percentage of Advisors expecting a market correction rising to 31.7%, its highest percentage since April 2020. This is viewed as a bullish contrarian indicator when it reaches extreme levels as it means advisors have been raising cash and will need to put those funds back to work. That was also seen in a rise in the National Association of Active Investment Managers (NAAIM) Exposure Index which saw a jump from 44.2 to 68.3, a bullish condition.

 Despite what looks like a possible summer rally for the major averages, the summer is usually a weak period for stocks and June has had a poor track record for years. According to the Stock Trader's Almanac, the week after June 'Triple-Witching Options Day' has been down on 24 of the last 29 years. Over that same period, the S&P 500 has only posted positive 55% of the time. Still, the major averages have been stuck in a trading range lately and look like they may be ready to take another stab at new highs before this run stalls, as market internals improve. At this stage, while the current rally is beginning to show signs of wear, it does not appear like we are due for anything more than some backing and filling over the near term as we look for signs of negative divergence in the charts that could hint that the bull is due for a rest. With the Market Edge Market Timing Model in negative ground, keep an eye on the market Edge Weekly Market Letter for signs that the Market Posture has changed to Sell.

 

CYCLICAL TREND INDEX (CTI): Neutral

Presently the CTI is Negative at -5, down 8 units from the previous month. The counts for Cycles A, B, C, D Bearish and E is Bullish.

Cycle

Average # Of Weeks

In The Cycle

# Of Weeks Since

Previous Bottom

Bullish Or Bearish

Connotation

A

6 +  or    -1 Week

4 Weeks

Bearish

B

18 +  or    -2 Weeks

12 Weeks

Bearish

C

36 +  or    -4 Weeks

30 Weeks

Bearish

D

72 + or    -7 Weeks

61 Weeks

Bearish

E

216 + or   -20 Weeks

61 Weeks

Bullish

 

The following are projected CTI readings through the week ending 6/25/21. 

Week Ending

CTI

Connotation

5/28/21 (Actual)

-5

Bearish

6/04/21 (Projected)

-6

Bearish

6/11/21 (Projected)

-6

Bearish

6/18/21 (Projected)

-9

Bearish

6/25/21 (Projected)

-9

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 - 05/28/21   (29410.00 – 34529.45)

DJIA Gain/Loss

+5119.45

 

 

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: Neutral

 

As of the close on 5/28/21, 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.

 

Prev. Highs

DJIA

DJTA

S&P 500

NYSE

R-2000

NASDAQ

UTIL

A/D LINE

Apr 2021

34777.76

15943.30

4232.60

16590.43

2360.17

14138.78

933.37

+523500

5/31/2021

34529.45

15750.31

4204.11

16555.66

2268.97

13748.74

897.35

+522178

%Change

-0.7%

-1.2%

-0.7%

-0.2%

-3.9%

-2.8%

-3.9%

-0.3%

 

Average % Change of the Broad Market Indices: -1.9%

 

The broader market indexes are down on average -1.9% from their April 2021 closing highs vs. 0.7% for the DJIA resulting in the Neutral +1 reading. Breadth was positive during the month at the NYSE as the Advance/Decline Line gained 4636 units vs. a gain of 6745 units in April while the number of new 52-week highs surpassed the new lows on 18 out of 20 sessions. The breadth at the NASDAQ was also positive as the A/D line gained 56 units vs. a gain 1091 units in April, while the number of new highs surpassed the new lows on 16 out of 20 sessions. Finally, the percentage of stocks above their 50-day moving average fell to 67.0% from 70.4% while those above their 200-day decreased to 84.8% vs. 87.3% from the previous month. Readings above 70.0% denote an overbought condition. 

 

SENTIMENT INDEX: Negative

 

The Sentiment Index for the month ending 5/28/21 is Negative at -1, up three 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 (0.22 vs. 0.18) is Bullish. NYSE short interest was up +2.4% and 3.1 days of average volume for the period ending 5/15/21 vs. being up +0.4% and 2.9 days average volume to cover at the end of April. Short interest at the NASDAQ was up +2.7% and 2.3 days of average volume mid-May vs. a -0.4% decrease and 2.5 days average volume to cover on 4/30/21. The Fear and Greed Index (37.6 vs. 61.0), the AAII Bull-Bear Ratio (1.4 vs. 1.7), the Percentage of Bullish Investment Advisors (51.5% vs. 59.2%), NAAIM Exposure Index (68.3 vs. 103.7), and the VIX, a measurement of fear in the market, 16.76 vs. 18.61) are Neutral. The Percentage of Bearish Investment Advisors (16.8% vs. 16.5%), the Bullish-Bearish Investment Advisors Ratio (3.1 vs. 3.6) and the Total Put/Call Ratio (0.76 vs. 0.81) 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: Neutral

 

Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Neutral as of the week ending 5/28/2021 (DJIA – 34529.45). The Market Posture is expected to remain neutral through the end of July 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.

 

 

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Market Indicators

Market Posture Cyclical Trend Index
Bearish
-9
As of: 06/18/2021
As of: 06/18/2021
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Market Recap - 06/22/2021

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 14253.27 111.79 0.79% 10.59%
DJ UTILITIES 890.32 -6.6 -0.74% 2.97%
DJ TRANSPORT 14940.56 32.92 0.22% 19.46%
DJ INDUSTRIALS 33945.58 68.61 0.2% 10.91%
NYSE COMPOSITE 16449.01 37.03 0.23% 13.25%
S & P 100 INDEX 1940.89 12.65 0.66% 12.81%
RUSSELL 2000 2295.95 9.86 0.43% 16.26%
S&P 500 4246.44 21.65 0.51% 13.06%
CBOE MKT VOLATILITY 16.66 -1.23 -6.88% -26.77%
AMEX COMPOSITE 3227.91 23.05 0.72% 36.72%
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