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The report is for week of June 22, 2020, and includes analysis of major market indexes and ETFs. Access to full article requires Premium Articles subscription.

Report contents

  1. Weekly summary and recap.
  2. Weekly analysis of major indexes.
  3. Major index overbought/oversold conditions.
  4. Analysis of popular ETFs.
  5. Low volatility versus high beta analysis.
  6. Sector performance.
  7. Chart of the week.
  8. Conclusion.

No 2 above includes:

  • S&P 500 weekly analysis.
  • Stock – bonds and stocks – gold correlation.
  • Correlation pattern of S&P 100 index constituents.
  • Market bottom indicator status.

1. Weekly summary

  • Stocks rebounded after a weak opening.
  • High beta large cap profit taking continued.
  • Low volatility large caps rallied.
  • Bond yields were unchanged on the week.
  • Gold was slightly higher and crude oil rebounded.
  • U.S. dollar gained on the week.

Recap (June 15, 2020 – June 19, 2020)

Index Week YTD
S&P 500 +1.9% -4.1%
DJIA +1.0% -9.4%
NASDAQ +3.7% +10.9%
Russell 2000 +2.2% -15.0%
10-Year Note unch -1.22%
Gold (London fix) +0.1% +13.9%
Dollar Index +0.3% +1.6%
WTI Crude Spot +9.5% -35.1%
Bitcoin Futures -1.6% +29.2%

2. Weekly analysis of major indexes

The S&P 500 gained 1.9% on the week.

The index rallied to recover less than half of the loss of the previous week. Weekly momentum remained flat and below the longer-term average according to PAL OB/OS indicator.

The key question is this: Will the index test first the attractor level around 3027 where horizontal support and the 40-week moving average converge, or will it attempt to test first the previous week’s highs around 3233 and afterwards the major resistance at 3260?

A reasonable expectation is that the test of the attractor will occur first and then the market will forge higher again squeezing shorts in the process. This may be the case there if are no fundamental news that will interfere with the technicals. It is quite possible that the 3027 attractor level will turn into medium-term support. A drop below 2965 may invalidate this scenario.

Some traders and especially some fund managers are watching the stocks-bonds correlation after its recent spike. As the chart below shows, the 60-day correlation of SPY and TLT daily returns spiked from nearly -0.70 in March to around -0.35 early this month. Since then the correlation has dropped again to about -0.50.

We believe that the correlation increase in March was due to portfolio rebalancing. The current value of the correlation is close to the longer-term average, as it may be seen in the above chart. Therefore, we do not believe that there is high probability that bonds will follow stocks if another correction starts. In fact, bond prices may rally in that case.

Another problematic correlation according to some traders is between stocks and gold. The chart below shows the 60-day correlation of daily returns of SPY and GLD.

SPY-GLD correlation was around -0.6 when the market correction started in February but then rose above +0.20. Note that the longer-term correlation is close to 0 as expected. From anti-correlated, gold became correlated to stocks during the recent market correction. However, this is not a new pattern; it also occurred during the 2008 bear market when stocks and gold moved together, as marked on the above chart. That pattern fueled then talk about “financialization of gold” and commodities in general.

In our opinion and due to these correlation patterns in the past, gold is not a good hedge of stock market corrections but may offer protection against extreme events that could impact financial transactions or cause high inflation.

As the 60-day correlation matrix of 34 ETFs below shows, TLT and UUP (U.S. dollar index) are anti-correlated with all ETFs other than precious metals and energy.

Note that the mean 60-day correlation of SPY and UUP is -0.12 and it is not very low but nevertheless negative.

The average 120-day correlation of the returns of S&P 100 stocks with the index decreased slightly after a recent rebound but remains high.

Since the market rebound started on March 23 of this year, this correlation has remained high between 0.80 and 0.82 and has to decrease significantly before a return to “normality.”

Three weeks ago we wrote:

… stocks can go down as fast as they go up when this correlation remains high.

In a past Premium Insights article we included an indicator that has the potential of timing a bottom. Below is the chart with the indicator updated as of the close of Friday, June 19, 2020.

The indicator fell from 1.92 to 1.68 last week after recently rising above levels that signaled the 2003 and 2008 bear market bottoms. This indicator has not formed double tops in the past but the sample is small and there is still small probability of a market reversal towards the March lows. According to the indicator, the bottoming process does not show any signs of faltering at this point.

3. Major index overbought/oversold conditions in daily and weekly timeframes

Daily timeframe

There are no overbought/oversold conditions in the daily timeframe.  NASDAQ ($COMP) is up 10.9% year-to-date. Russell 2000 ($RUT) is down 15% year-to-date and down 18.5% from all-time-highs.

Weekly timeframe

There are no overbought/oversold conditions in the weekly timeframe according to PAL OB/OS indicator. NASDAQ is at new weekly all-time highs.

4. Analysis of 34 popular ETFs.

Daily timeframe

ETFs are sorted by highest value of RSI(14) indicator.

There are no overbought/oversold ETFs in daily timeframe. IBB (biotech) made new, all-time highs.

IBB

After a gain of 3.3% on Friday the biotech ETF is now in uncharted territory. A further rise is possible.

Weekly timeframe

ETFs are sorted by highest weekly return.

Only UNG is oversold in weekly timeframe for two weeks according to PAL OB/OS indicator. There are no overbought ETFs; QQQ, XLK and IBB are at weekly all-time highs.

5. Low volatility versus high beta large caps analysis

Low Volatility S&P 500 ETF (SPLV) rose 1.8% while the High Beta S&P 500 ETF (SPHB) fell 0.3% on the week.

Last week we wrote:

This is one of the few charts that indicate a correction may be due but the samples are small. Specifically, the ratio fell below 1.04 before the 2015 and 2018 corrections. A crowded trade in high beta large caps is not sustainable for long.

We expect the mean-reversion to end this week and high beta large caps to rebound in the next two weeks if there are no negative surprises from fundamentals.

6. Sector performance

Major sector ETFs are sorted by highest weekly return.

There are no overbought/oversold sector ETFs in the weekly timeframe. XLK (technology) is at weekly all-time highs. Only XLE (energy) and XLU (utilities) were down on the week.

7. Chart of the week

Gold two-month consolidation pattern

The daily chart of gold spot (London fix) shows a two-month consolidation pattern below crucial resistance at 1750. These consolidation patterns are frequent in gold and the last two (marked on the chart) in 2018 and 2016 were followed by lower prices. There is higher probability this time of a resolution in favor of higher prices.

8. Conclusion

Last week we wrote:

…there are signs of return to normality but also indications of elevated risks. No action may be the best action at this point until more data are available.

Daily VIX rose to 35.12 last week. The mean VIX value since inception is 19.36.

VIX has risen above 30 in the past during bear markets and large corrections and indicates elevated risk. However, we cannot know whether the market lags VIX or the other way around. In 1998, VIX rose near 40 during the Russian Rubble crisis and then stayed above 20 while the market rallied for about two more years. It is difficult to know how market regime changes affect correlation between VIX and S&P 500. Despite that, VIX at 35 shows that the market is not ready yet to declare it is back to normal; caution must be exercised against left tail events that may be triggered suddenly and result in significant drawdown levels.

Notes:

-Overbought conditions occur in daily timeframe when RSI(14) indicator is greater than 70 and oversold when the indicator is less than 30. Length of overbought/oversold conditions in days is also shown. 
-Overbought conditions occur in weekly timeframe when PAL OB/OS indicator is greater than 90 and oversold when the indicator is less than 10. Length of overbought/oversold conditions in weeks is also shown.
-Normally, overbought/oversold conditions indicate rising momentum in the relevant direction but they are also used as reversal indicators. 


If you have any questions, you may contact support.

Specific disclaimer: This report includes charts that may reference price target levels determined by technical and/or quantitative analysis. No updates to charts will be provided if market condition changes occur that affect the levels on the charts and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.

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 and backtesting program: Amibroker

Data provider: Norgate Data

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