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Weekly Market Analysis – December 18, 2017 [Premium Articles]

The weekly premium market report focuses on quantitative analysis. It includes a market recap with commentary, directional probabilities of major ETFs and DJIA stocks, equity index breadth indicators and weekly mean-reversion signals. New: We now include BTC and ETH analysis based on unique indicators.

Weekly Market Recap (December 11 – December 15, 2017)

U.S. stocks were higher on the week. The S&P 500 rose 0.9%, NASDAQ gained 1.4% and the Russell 2000 added 0.6%. Technology and consumer goods led advances. Conglomerates and utilities led declines. The 10-Year Note yield fell three basis points to 2.35%. Gold was higher but crude oil was marginally lower. The U.S. dollar index was also lower. Bitcoin rose to new highs after the introduction of futures contracts.

Market Commentary

Volatility fell as stock indexes rose to new all-time highs. VIX ended the week at 9.42, after making a low at 9.21. The S&P 500 rose 0.9% although action in both low volatility and high beta large caps was subdued. The main driver of gains was technology with NASDAQ-100 rising 1.2%.  Gold and bonds gained on the back of a weaker U.S. dollar.

The S&P 500 1-lag autocorrelation of daily returns remains negative and significantly so, although the index continues to make new all-time highs.

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ETF Performance (total return where applicable)

ETF Week YTD OB/OS*
SPY +0.89% +22.2% 99.46
SPLV +0.17% +18.1%  88.42
SPHB +0.02% +15.9% 98.63
DIA +1.31% +27.5% 99.35
QQQ +1.91% +34.0% 65.55
IWM +0.55% +14.0% 61.21
GLD +0.59% +8.7% 26.41
TLT +1.31% +10.2%  96.94
UUP -0.04% -7.7%  80.05
DBC -0.75% +0.0% 5.35 

*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 up 34% YTD followed by Dow Jones (DIA) at 27.5% and S&P 500 (SPY) at 22.2%. Bonds (TLT) with +10.2% YTD underperform stocks. The U.S. Dollar Index (UUP) YTD return was marginally lower on the week at -7.7% providing support to gold (GLD) with YTD return at +8.7%. The YTD return spread between low volatility large caps (SPLV) and high beta large caps (SPHB)  is now at +2.2%.

SPY is the most overbought ETF, followed by DIA, SPHB and TLT. DBC is the only oversold ETF.

Quantitative analysis of major ETFs 

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 ETFs since inception
  • Results are sorted by highest directional bias P-delta

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.) 

TLT has the largest positive directional bias P-delta followed by SPY and DIA. DBC, SPHB and GLD have most negative directional bias.

Breadth indicators 

A few summary statistics from last week are shown in the table below:

S&P 500 stock with Last week Two week ago
Price > SMA(20) 355 369
RSI(14) > 70 49 87
RSI(14) < 30 5 4

The number of S&P 500 stocks with price above their 20-day moving average fell from 369 two weeks ago to 355 last week along with the number of stocks with RSI(14) above 70 from 87 to 49. The number of stocks with RSI(14) below 30 increased to 5 from 5. Despite these changes in these breadth indicators, the S&P 500 index made a new all-time high because of the rally in technology stocks.

DJIA average correlation with component stocks 

This indicator shows the average 120-day correlation of Dow 30 components with the index. Note that we have kept BAC in place of V to extend the indicator beyond 2009 and include the two previous tops and bottoms. If we use V instead, there is a little change in results after 2009.

The average correlation indicator remained unchanged last week at 0.387 but it is now close to the 2000 top value near 0.30. This is a warning signal about a possible correction or bear market but this indicator cannot provide the timing of such event with any reasonable accuracy.

DJIA Average RSI(14)

The average RSI(14) of the Dow Jones Industrial Average in the daily timeframe rose to 62.39 from 59.69. This indicator is the average of the RSI(14) values of all current constituents of the index. The current value reflects rising momentum

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

The weekly results indicate positive 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 22 stocks with positive directional bias and 8 stocks with negative. The ratio of positive to total is 0.73 as shown above. 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 12/30 two weeks ago
Dow 30 oversold count:       1/30 last week versus 1/30 two weeks ago

The above results indicate neutral to negative bias for next week.

Below are charts of the average weekly RSI(3) and count of overbought DJIA stocks based on the above four indicators:

The average weekly RSI is rising indicating increasing momentum and the overbought count is at 10. There are no extreme conditions to signal high probability of a correction.

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 not the 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 last week was +1.71% with 8/10 winners.

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

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Bitcoin and Ethereum analysis

Data as of the morning of Saturday, December 16, 2017. Click on the images to enlarge.

Bitcoin rose about 18% from Saturday morning of last week and after the introduction of CBOE futures. For an article about the potential impact of futures click here. Bitcoin is overbought according to average weekly RSI(3) but bubble markets can stay overbought without a correction for long period of time. In this case, oversold signals offer buying opportunities as long as the uptrend is intact, as it may be seen from the above chart. Volatility as measured by the weekly %ATR(3) fell slightly after futures introduction but remains at a high level above 18% of last price.

Ethereum gained about 57% from the morning of Saturday last week and it is not overbought according to average weekly RSI(3). Note that weekly %ATR(3) is at 24.8%, higher than bitcoin, and on an uptrend, i.e., risks are rising.

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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