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Market analysis for week of August 9, 2021. The analysis focuses on major market indexes, ETFs, commodities and forex.

Report contents

  1. Weekly summary and recap.
  2. Analysis of major indexes.
  3. Popular ETFs.
  4. Asset and Factor ETFs
  5. Commodity ETFs.
  6. Spot currency pairs.
  7. Markets to Watch.

1. Weekly summary and recap

  • U.S. stocks were higher on the week.
  • High beta large caps gained for a third week in a row.
  • Action in low volatility large caps was subdued.
  • Bond prices were lower and yields rose.
  • Commodities fell due to advancing US dollar.
  • Gold finished another volatile week with losses.
  • The U.S. dollar index was higher on the week.


Recap
(August 2, 2021 – August 6, 2021)

Large caps (S&P 500) rose 0.9%. Tech stocks (NASDAQ-100) were up 1% and small caps (Russell 2000) also gained 1%. The Dow 30 added 0.8%. The rebound in high beta large caps continued for a third week in a row. The CRB index ended the week down 1.6% with crude oil prices plunging nearly 8%. Spot gold fell 3.4% due to stronger US dollar. Bonds ended the week lower after a failed mid-week rally. The U.S. dollar index rebounded and nearly erased the losses of the previous week. The S&P 500 and Dow 30 finished the week at new all-time closing highs. Year-to-date crude is up 41.2% followed by high beta large caps with 30.7% gain. Gold shows year-to-date losses of 6.8% followed by Bonds Total return losing 1.4%.

2. Analysis of major indexes

VIX fell 11.5% to close at 16.15 for the week.

Two weeks ago I wrote:

[G]iven the strong mean-reversion dynamic in the stock market, a further drop in volatility has higher probability than sustained higher levels.

Last week I wrote:

Many are expecting higher VIX at this point and I won’t be surprised if it goes lower.

Stock market bears were squeezed again after the sixth short-term V-bottom year-to-date formed in S&P 500 on July 20. After this squeeze and drop in VIX, I expect moderate rise in volatility and some profit taking in the stock market. VIX could rebound towards 18.

The U.S. dollar index ended the week at 92.8 after rising 0.7%.

The critical resistance area for US dollar index is between 93.2 and 93.5. If the index breaks above 93.5, then it could reach 94 quickly. I still don’t think there is significant upside potential to US dollar index but forecasts and especially about currencies are hard. The US dollar index has been moving in a narrow range for the past seven weeks. At some point a short-term trend will develop but the market is still uncertain about the direction.

The yield of 10-Year Note gained five basis points to close at 1.29%.

Last week I wrote:

I expect higher short-term volatility in yields and eventually a reversal to the upside. There was enough of a retracement to squeeze out bond shorts and a change in direction may occur soon.

The reversal occurred on Wednesday after a failed rally in bond market. The low in 10-year Note yield was 1.13% on Wednesday followed by a gain of 16 basis points towards the close of Friday. The same low of 1.13% occurred on July 20 and this appears to be a short-term support. I expect 10-Year Note yield to reach1.35% next week.

The CRB commodities index fell 1.6% on the week.

Last week I wrote:

We may see a sudden reversal in CRB in the next few weeks towards 200. As shown in previous reports, CRB is highly correlated with crude oil. Average 252-day correlation of returns since 1994 is 0.77 and last value is 0.85. In comparison, the correlation with spot gold is only 0.15 and average since 1994 is 0.19.

Crude oil fell about 8% and the impact to CRB index was significant. I expect the reversal to continue towards 210 and even below.

The S&P 500 index gained 0.9% to finish at 4436.52 for the week.

There is nothing to see here other than those dips and subsequent reversals to new highs. This is a strong market driven by the recovery in the economy after the crash of last year.

Two weeks ago I wrote:

Dip buying is the prevailing dynamic this year and will only go away if there is a major change in fundamentals or an unexpected event.

This dip buying dynamic will probably continue for the rest of the year.

Low Volatility S&P 500 index ($SP5LVI) gained 0.4% to new all-time weekly closing highs while the High Beta S&P 500 index ($SP5HBI) rose 2.3% on the week.

Year-to-date, low volatility is up 12.5% versus a gain of 30.7% for high beta.

I don’t expect mean-reversion soon and narrowing of the spread between low volatility and high beta large caps. Eventually the spread will close but for now high beta is on a strong uptrend while low volatility is used with small but varying allocation to dampen volatility of portfolios.

3. Popular ETFs.

ETFs are sorted by highest RSI(14) value in daily timeframe.

There are no overbought/oversold ETFs. UNG is up the most (+57.4%) year-to-date while TAN is down the most (-16.1%).

UNG was up the most on the week (+5.2%) while USO fell the most (-6.1%).  Weekly divergences with positive natural gas futures and negative crude oil futures have occurred 18% of the time since April 1990, as shown in the chart below.

In the daily timeframe, positive natural gas futures and negative crude oil futures have occurred about 20% of the time. Therefore, these divergences are not rare.

Asset ETFs

ETFs are sorted by highest year-to-date return.

There are no overbought/oversold asset ETFs. Total Stock Market (VTI) ended the week at new all-time highs. Commodities (DBC) are up the most year-to-date (+29.3%) followed by Real Estate (VNQ) at 27.5% while gold (GLD) is down the most (-7.7%) followed by 20+ Year Treasury Bond (TLT) at -5.4%.

Below is a relative performance chart of seven asset ETFs since 2010.

It’s clear tech stock investors (QQQ) don’t care what commodities, gold, bonds, or the other assets are doing. Diversification can reduce volatility of a portfolio but this is another subject beyond the scope of the report.

Factor ETFs

ETFs are sorted by highest year-to-date return.

There are no overbought/oversold conditions in factor ETFs. Momentum (MTUM) gained 2.7%, the most on the week, and started closing the spread with the other factors. The gains in momentum may continue at the expense of value (VLUE) and growth (IWF).

5. Commodity ETFs

ETFs are sorted by highest year-to-date return.

Natural Gas (UNG) gained the most on the week (+5.2%) and platinum (PPLT) fell the most (-6.6%) and it is oversold in daily timeframe. There are no overbought commodity ETFs. REMX is up the most year-to-date (+67.7%) while platinum (PPLT) is down the most (-9.1%).

6. Spot currency pairs

Currency pairs are sorted by highest year-to-date return.

Currencies were mostly down against the U.S. dollar. New Zealand dollar gained the most (0.5%). The Chilean Peso fell the most (3.9%). There are no overbought/oversold currencies.

7. Markets to Watch

Crude Oil (USO)

A rebound could start after a drop near 45.

Gold (GLD)

GLD plunged 3.1% on the week after an unsuccessful attempt for break above the 40-week moving average.

Last week I wrote:

Another test of the 40-week moving average is possible, or even a break above it, but at this point the odds are in favor of lower prices.

I expect a rebound next week towards 167 followed by another reversal to the downside as long as the US dollar remains strong.

Rare Earths (REMX)

Last week I wrote:

REMX was frequently mentioned in these reports last year due to its potential for a rally driven by fundamentals. Further gains towards 128 are possible before a major correction and a break above 110 could serve as confirmation.

REMX is overbought in weekly timeframe but could hit 115 before profit taking starts.

Real Estate (VNQ)

VNQ could rise towards 110 before profit taking although it’s overbought in weekly timeframe according to PAL OB/OS indicator.

Forex (NZDUSD) 

NZDUSD failed to break above the 40-week moving average around 0.7104 and retreated to close at 0.7009. I expect another test of 0.6930 level.


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 95 and oversold when the indicator is less than 5. 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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