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Weekly Market Analysis – July 30, 2018  [Premium Articles]

The weekly premium market analysis includes a market recap with commentary and analysis, ETF performance report, directional probabilities and mean-reversion signals of DJIA stocks, equity index breadth indicators and cryptocurrency analysis.

Weekly Market Recap (July 23 – July 27, 2018)

U.S. stock indexes were mixed on the week. The S&P 500 and the Dow Jones Industrial Average gained 0.61% and 1.57%, respectively, but NASDAQ and the Russell 2000 shed 1.06 % and 1.97%, respectively. Financials and basic materials led advances. Conglomerates and technology led declines. The 10-Year Note yield gained six basis points to 2.96%. Gold fell but crude oil rose. The U.S. dollar was slightly higher. Bitcoin and ethereum gained on the week.

Summary

  • Technology and small cap stocks  were hit by profit taking
  • Selective large caps stocks moved higher
  • Rebound in bond yields continued
  • Commodity prices recovered
  • Quantitative analysis points to neutral short-term bias
  • Cryptocurrencies gained

Market Commentary 

The S&P 500 made an early attempt to challenge major resistance at 2873 by reaching as high as 2848.03 but fell on Friday to close at 2818.82 for the week. More attempts to challenge the all-time high of January 26 may follow. One factor that provides support to the market is expectations by traders of a short-term correction. The market may initiate the correction after bearish expectations subside.

The S&P 500 is now overbought for a second week in a row with average weekly RSI(3) at 95.67, as shown in the above chart. Overbought conditions may persist for a few more weeks before a correction starts. Regardless, it is almost certain that a correction will occur because excesses have accumulated, especially in the tech sector. For example, despite recent earnings-driven corrections in NFLX and FB, the equal weight FAANG portfolio year-to-date return is now where it was in beginning of the month. Therefore, a correction may have some room to cover.

On the fixed income side, bonds fell for a second week in a row and are now oversold according to average weekly RSI(3). The 10-Year Note yield rose to 2.96%. The high of May was at 3.12%. Support for TLT is near 118 and a test in the next couple of weeks is highly probable before a rebound occurs.

If stocks start to correct we expect bonds to rebound with high probability. There is always a small probability that both stocks and bonds will fall. This is worst case scenario of investors in stock/bond portfolios. Year-to-date return of the 60/40 portfolio in SPY/TLT is only 1.89% versus 6.35% for SPY, as shown below.

These are not good times for strategic allocation and risks may increase in the future if stocks enter stagnation phase and bond continue to fall due to rising interest rates.

ETF Performance (total return where applicable)

ETF Week YTD OB/OS*
SPY +0.62% +6.35% 95.90
SPLV +0.83% +1.86% 73.92
SPHB +0.54% +4.45% 91.45
DIA +1.53% +3.92% 95.90
QQQ -0.77% +14.46% 59.17
IWM -1.91% +9.04% 31.55
GLD -0.63% -6.32% 1.11
TLT -1.08% -4.81% 5.39
UUP +0.28% +4.12% 72.76
DBC +1.83% +3.85% 43.71

*Overbought/oversold conditions are based on the average of four momentum indicators: Wilder’s RSI(3), Cutler’s RSI(3), Harris’ RSI(3) and GFI(3). Overbought conditions occur when the average is > 90 and oversold when it is < 10. 

Technology (QQQ) is still leading in the above table with year-to-date return of 14.46%, followed by small caps (IWM), S&P 500 (SPY), High Beta S&P 500 (SPHB), U.S. Dollar Index (UUP), Dow Jones (DIA), commodities (DBC) and Low Volatility S&P 500 (SPLV) in that order. Bonds (TLT) and Gold (GLD) are in red year-to-date.

According to the average weekly RSI(3), S&P 500 (SPY), High Beta S&P 500 (SPHB) and Dow Jones (DIA) are overbought. Gold (GLD) and bonds (TLT) are oversold.

Quantitative analysis of DJIA stocks 

Notes

  • In the results below, the Last Date of weekly bars is shown as the last date of the week
  • The calculations are based on weekly adjusted data for Dow-30 stocks since 01/2000
  • Results are sorted by highest directional bias P-delta times significance S
  • Long/Short are not trading signals but refer to directional bias

The results indicate neutral short-term bias.

TS is the profit-target and stop-loss,  P-long and P-short are the long and short probabilities, P-delta is the difference  (P-long – P-short), a measure of the directional bias and S is the significance of the result (for weekly data 0 means low or no significance.) 

There are 16 stocks with positive directional bias and 14 stocks with negative. The ratio of positive to total is 0.53. A ratio above 0.7 indicates strong positive bias and a ratio below 0.50 indicates strong negative bias.

Overbought/Oversold conditions

The overbought/oversold counts below are for Dow 30 stocks and are based on the average of four indicators: Wilder’s RSI(3), Cutler’s RSI(3), Harris’ RSI(3) and GFI(3). Overbought conditions occur when the average is > 90 and oversold when < 10. 

Dow 30 overbought count: 10/30 last week versus 9/30 two weeks ago
Dow 30 oversold count:       1/30 last week versus 1/30 two weeks ago

The above results indicate increasing momentum in overbought territory for a second week in a row now. This means that odds of a correction are rising.

Weekly mean-reversion signals

The mean-reversion signals are generated by our proprietary PSI5 algo applied to weekly data of Dow 30 stocks. Note: The mean-reversion signals are provided for informational purposes only and in this particular form do not constitute a systematic trading strategy, such as the one discussed in this article. Only entry signals are provided in these weekly premium articles but no exit signals since this is not a signal service. Usually, mean-reversion signals exit at the open of the week after the entry occurs but this is not always the case if the long signal is persistent.

The average profit/loss of mean-reversion signals in the last report from open to close of the week was +2.17% but for the relevant strategy it was +1.0% due to previously open positions. The strategy is up +9.0% year-to-date. More details about the strategy can be found in this article. Below is the equity chart of the strategy.

DOW Weekly Mean-Reversion Equity from 01/07/2000 to 07/27/2018

New long-only mean-reversion signals were generated for:

AAPL, V, IBM, HD

Bitcoin and Ethereum analysis

Data as of Sunday, July 29, 2018, 9:00 AM EST. Click on the images to enlarge.

Bitcoin rose about 6% on the week and it is now overbought according to average weekly RSI(3).  Note that each time bitcoin was overbought in recent past according to this indicator, a correction followed. The medium-term target remains at 5968 but in the short-term bitcoin could rise to 9968 due to volatile action.

Ethereum rose about 3%. The medium-term target at 360 still applies but a test of resistance at 560 and near the 52-week moving average could occur before that.

If you have any questions, you can email us at: premium@priceactionlab.com

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting program: Amibroker

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