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Weekly premium reports include a market recap with commentary, performance report of selected ETFs and portfolios, technical analysis with unique indicators and directional probabilities based on machine learning.

Weekly Market Recap (April 3  – April 7, 2017)

U.S. stocks were lower on the week. The S&P 500 lost 0.3%, NASDAQ fell 0.6% and the Russell 2000 shed 1.5%. Conglomerates and financials led declines. Basic materials led advances. The 10-Year Note yield fell three basis points to 2.37%. Gold, crude oil and the U.S. dollar were higher on the week.

Commentary

The high beta S&P 500 ETF (SPHB) and the low volatility S&P 500 ETF (SPLV) were both moderately lower on the week, -0.4% and -0.2%, respectively, as shown in the weekly chart below.

This could be the beginning of a broad market correction but it is still early to draw such conclusions although some indicators, for example Trend Momersion, are at extreme levels.

Momersion in unadjusted SPY still remains near all-time low levels, as shown in the chart below.

It may be seen from past behavior that recovery towards 50 is fast after it starts. That occurs either with as a correction or rally. Although a repeat of price action of the mid 1990s cannot be ruled out, economic conditions and valuations do not support this scenario and a correction is more probable.

Gold (GLD) retested the attractor at 120 and then prices fell but closed higher on the week. If the stock market starts correcting next week, a gap above the 40-week moving average is possible. Although some analysts expect silver to rally, price action below resistance at 17.5 was disappointing. Another test of resistance at this level is possible for SLV but odds are increasing in favor of a correction.

   

The anti-correlation between the U.S dollar and gold is significant, as shown in the chart below.

Although the 60-day price correlation between UUP and GLD has increased from near -0.9 in January to -0.22, the 60-day returns correlation remains at -0.67. As long as the U.S. dollar shows strength, no significant uptrend can develop in precious metals.

ETF Performance

ETF Week YTD MAX YTD
SPY -0.2% 5.68% 7.27%
SPLV -0.2% 4.92% 6.11%
SPHB -0.4% 2.45% 5.60%
SPHD -0.4% 3.97% 5.53%
QQQ -0.3% 11.61% 12.04%
IWM -1.4% 0.79% 4.07%
GLD +0.6% 8.99% 9.21%
TLT +0.2% 1.96% 2.90%
UUP +0.8% -1.17% 0.91%
DBC  +1.3% -2.71% 1.33%

Although equity index ETFs fell on the week, there were no significant changes in the above table. Tech stocks (QQQ) maintained their lead at the top with 11.61% YTD return, followed by gold (GLD) in second place with 9% YTD return and S&P 500 (SPY) in third place with 5.68% YTD return.  Small caps (IWM) weakness resumed and this ETF is again flirting with negative YTD return. There were gains in the U.S. dollar (UUP) and commodities (DBC). These last two ETFs still have negative YTD performance. Bonds (TLT) had small gains but YTD performance is below 2%.

Price Action Lab Diversified Portfolio  

The year-to-date return of the passive portfolio allocation in SPY/TLT/GLD/DBC with weights 50/30/10/10 rose to 4.05%, mainly due to the rebound in GLD and DBC.

The 60/40 SPY/TLT portfolio year-to-date return fell slightly to 4.19%.

Technical Analysis

The average RSI(14) of the Dow Jones Industrial Average fell to 50.96 in neutral territoryThis indicator is the average of the RSI(14) values of all current constituents of the index. Values of this indicator above 60 have in the past preceded prolonged sideways action and short-term corrections.

The Trend Momersion indicator (daily data) is moving sideways at 99.06, as the uptrend remains intact at this point.

Values of this indicator above 90 have in the past preceded short-term corrections or even major tops. An exception is the 2013-2015 period when Fed intervention prevented a market correction. The indicator is now near saturation level of 100. The next natural market development is a correction but no indicator can pinpoint the exact timing.

SPY Expectation

The 200-day moving average of the error between expected and actual price remains negative at -0.164, as shown in the second indicator pane of the above chart. In the past, this moving average turned positive before corrections, i.e., there was persistent overestimation of the expected price before a change in trend.

The 200-day moving average of the expected return, shown in the third indicator pane of the above chart, is flattening and this could be an early sign of a pending correction. However, the signal is still not conclusive.

Machine learning (P-indicator)

Notes

  • In p-indicator results, the Last Date of weekly bars is shown as the first date of the week. The Open, High, Low and Close of weekly bars are based on the actual weekly variation of prices.
  • The calculations are based on weekly adjusted data for Dow-30 stocks since 01/2000

The weekly results indicate negative short-term bias.

TS is the profit-target and stop-loss file,  P-long and P-short are the long and short probabilities for a position in the corresponding ticker, 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.) In the results, the Last Date of weekly data is the first date of the week.

There are 13 stocks with positive directional bias and 17 stocks with negative. The ratio of positive to total is 0.43. A ratio above 0.7 indicates strong positive bias and a ratio below 0.50 indicates strong negative bias. Note that this is a potential sell signal but not a significant short signal since average PS is slightly below average PL.

Overbought/Oversold conditions

  • Overbought (OB)/oversold (OS) conditions 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.
  • ETFs considered: SPY QQQ DIA GLD SLV TLT USO DBC IWM XLF EEM XLE EFA EWJ XLP XLV XRT XLU XLK XLB XLI UNG IBB IYR SMH TAN GDX XHB XME MDY
  • Tickers in bold indicate OB/OS conditions also in the daily timeframe

ETFs

OB: IYR, UNG
OS: TAN

Stocks

OB: KO, MCD
OS: CSCO, NKE, PG, TRV

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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