Premium Market Analysis

Premium Content Sample Report

Market analysis for week of May 17, 2021. The analysis includes stocks, ETFs, commodities and forex. Access to full article requires Premium Articles subscription.

This is a sample report. The information in this report is now outdated.

Report contents

  1. Weekly summary and recap.
  2. Analysis of major indexes.
  3. Popular ETFs.
  4. Sector, Factor and Asset ETFs
  5. Commodity ETFs.
  6. Spot currency pairs.
  7. Chart of the week.

1. Weekly summary and recap

  • U.S. stocks were lower on the week.
  • Tech stocks fell the most on the week
  • Bond prices moved lower.
  • The rally in commodities took a breather.
  • The rebound in crude oil and gold continued.
  • The U.S. dollar index was moderately higher.

Recap (May 10, 2021 – May 14, 2021)

Large caps (S&P 500) fell 1.4% after a volatile week. Tech stocks (NASDAQ-100) fell 2.4%. Small caps (Russell 2000) shed 2.1% while the Dow Jones Industrial Average was down 1.1%. High beta and low volatility large caps also fell but losses were limited to around 0.5%. Commodities were hit by profit taking and the CRB index shed 1.8%. The rebound in gold and crude oil continued with small gains. Bond prices moved lower. The U.S. dollar was marginally higher after a volatile week.

2. Analysis of major indexes

VIX rose 12.7% to close at 18.81 after rising as much as 73.3% to 28.93 during the week.

Last week I wrote:

If VIX breaks below 16.25, then the fall may continue towards 13.5 or even lower.

Depending on key factors and especially on commodity and forex price action, VIX may fall next week. Specifically, if selling pressures in commodities and U.S. dollar continue next week, VIX may fall below 16.25 and towards 15.

The U.S. dollar index gained 0.1% after a volatile week.

After a drop of 1.1% the week before, the U.S dollar index managed to recover after a volatile week. A down reversal of -0.5% on the last day of the week may be an indicator of a continuing downtrend in the short-term.

Last week I wrote:

The critical support area is between 89.20 and 88.25.

A test of January lows around 89.20 is highly probable at this point unless there are renewed expectations about an interest rate hike.  See chart of the week at the end of this report for a correlation table of various assets. Briefly, the U.S. dollar is the only anti-correlated asset among all assets classes. Even precious metals are anticorrelated with the dollar and bonds having a low correlation. This means that price action in forex markets may be a leading indicator of price action in virtually all assets.

The yield of 10-Year Note rose six basis points to 1.64%.

Last week I wrote:

[T]he critical level to watch is 1.75% and there is now higher probability after this rebound of a test of this level in the next two weeks.

The 10-Year Note yields have been in 5-week consolidation due to uncertainty about inflation and path of interest rates. There are two key levels in my opinion: 1.75% and 1.42%. A break above the former level may signal a medium-term uptrend in yields and downtrend in bond prices and a break below the latter may signal return of deflationary pressures. It is peculiar there is so much uncertainty while the alternatives are basically extreme but this is what it is.

The CRB commodities index fell 1.8% on the week.

Last week I wrote:

In my opinion, the bull market in commodities is slowly coming to an end but a break above 232 in CRB will invalidate this view…

There were signs this week the uptrend in commodities may have reached a top. In my opinion while this is highly possible given violent reversals especially in grains, there is also high uncertainty and even misinformation so we must be careful here. The uptrend may end but after a period of consolidation above current levels in CRB index.

The S&P 500 index fell 1.4% on the week after dropping as much as 4.2% during the week.

Last week I wrote:

I am still expecting a small correction despite the rise last week.

The S&P 500 index fell 4.2% by the close of Wednesday but rebounded 1.2% on Thursday and then 1.5% on Friday and losses for the week were reduced to 1.4%.

A reversal in commodities and the U.S. dollar may provide the fuel for additional gains in stocks next week until economic conditions are clearer about inflation and the path of interest rates.

The Low Volatility S&P 500 index ($SP5LVI) fell 0.4% while the High Beta S&P 500 index ($SP5HBI) lost 0.6% on the week.

Losses in both low volatility and high beta large caps were limited by the close of Friday. Low volatility recovered after a loss of 2.3% on Wednesday and high beta rebounded after losing as much as 5%. The strong recovery in these indexes to losses of about 0.5% for the week is a positive sign for the stock market.

3. Popular ETFs.

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

After the whipsaw of last week there are no overbought/oversold conditions in popular ETFs. GDX gained the most (1.1%) while XHB fell the most (-4.2%). XLF and XLB made new all-time highs.

TAN

TAN is oversold in the weekly timeframe according to PAL OB/OS indicator.  A rebound towards 80 could be next.

Sector ETFs

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

Banks (KBE), Materials (XLB) and Financials (XLF) are at new all-time highs. There are no overbought/oversold sector ETFs. Consumer Discretionary (XLY) fell the most on the week (-3.9%).

XLK

XLK is becoming oversold in the weekly timeframe according to PAL OB/OS indicator. After a rebound from lows last week, a rise toward 140 could follow.

Asset ETFs

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

All assets fell on the week except U.S. dollar (UUP ) and gold (GLD). There are no overbought/oversold asset ETFs. Emerging markets stocks (VWO) fell the most (-3.2%).  See chart of the day at the end of the report for asset ETFs correlations.

GLD

GLD could rally towards 178 if there is a break above 173.

Factor ETFs

All factors fell on the week with momentum (MTUM) losing the most (-3.8%) while low volatility (USMV) had small losses (-0.4%). There are no overbought/oversold factor ETFs. Note the high 60-day correlation of daily returns of the factor ETFs below.

The lowest 60-day correlation is between value and momentum at 0.51 while the highest is between growth and momentum at 0.97, as expected. If there is a bear market, factor investing will not provide any protection other than possibly a little lower drawdown than the market.

5. Commodity ETFs

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

Basic Material (IYM) made new all-time highs. There are no overbought/oversold commodity ETFs. Corn (CORN) plunged 13.1% on the week. Rare Earths and Wheat fell 7.3% and 7.2%, respectively. Still, it may be early to call the top in commodities.

CORN

Last week I wrote:

There may be some resistance around 23.50 and the parabolic rise may be brought to a temporary or even final halt.

The high was at 22.74 and afterwards the ETF plunged 13.1%. This could be the top in CORN but higher volatility action could follow.

6. Spot currency pairs

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

Canadian Dollar is overbought. There are no oversold currencies. Currencies were mixed on the week. Hungarian Forint rose 0.8% while South Korean Won fell 1.3%. Canadian dollar is up 5.2% versus the U.S. dollar year-to-date while the Japanese Yen is down 5.6%.

CADUSD

CADUSD made a high at 0.8304 and then retreated to close at 0.8264. A break above 0.8310 could fuel a rise towards 0.8375. Note that CADUSD is overbought in the weekly timeframe according to PAL OB/OIS indicator and a correction may follow soon.

7. Chart of the Week

Asset Correlations

The above table of 120-day correlation of returns of assets shows the following:

  • All assets are basically anti-correlated with the U.S. dollar (UUP)
  • There is very low correlation between bonds (TLT) and commodities (DBC)
  • There is low correlation between stocks (VTI) and bonds (TLT)

Basically, gains in the majority of assets are associated with losses in U.S. dollar. This is not a cause and affect but the result of a complex process. However, the apparent cause is often used to engineer a true cause because investors believe the returns are the result of the process when in fact they are due to financial engineering. In other words, the Fed may try to push the dollar down to offer an impression of improvement in assets, as it was done numerous times in the past, but eventually other countries will respond by devaluing their currencies to stay competitive in export markets. It is a complex but also cunning game at times.

Announcement: This is the link for the annual All-in-One subscription offer for 50% discount that was announced earlier this week. This offer will expire Monday, May 17, 2021.

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

If you found this article interesting, you may follow this blog via RSS or Email, or in Twitter

Disclaimer

Click here to subscribe.

Price Action Lab Blog Premium Content