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The report is for week of August 10, 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, factor, country and commodity ETF performance.
  7. Chart of the week.
  8. Conclusion.

No 2 above includes:

  • S&P 500 weekly technical analysis.
  • Backtest of a unique price action pattern in S&P 500.
  • NASDAQ-100, Dow Jones Industrial Average and Russell 2000 analysis.
  • Correlation pattern of S&P 100 index constituents.

1. Weekly summary

  • Stocks rose on the week amid a broad-based rally.
  • Bond yields rose slightly and prices fell.
  • Gold rally continued but stalled late in week.
  • U.S. dollar broke a sixth week losing streak.

Recap (August 3, 2020 – August 7, 2020)

Index Week YTD
S&P 500 +2.5% +3.7%
DJIA +3.8% -3.9%
NASDAQ +2.5% +22.7%
Russell 2000 +6.0% -5.9%
10-Year Note +2 bps -1.36%
Gold (London fix) +3.4% +33.4%
Dollar Index +0.1% -2.8%
WTI Crude Spot +2.7% -32.7%
Bitcoin Futures +3.3% +60.5%

2. Weekly analysis of major indexes

The S&P 500 rose 2.5% on the week.

As expected in previous reports, the index broke above 3283 and this occurred on the open of Monday. The index closed up every day of the week to end at 3351.28 and just 1% below the all-time high close at 3386.15.

In the weekly timeframe, the S&P 500 is still not overbought based on PAL OB/OS indicator. Based on overbought market considerations, the index has still room to climb further to test the all-time highs.

A unique pattern was formed in the S&P 500 last week. Below is a description of the pattern and a backtest in an effort to determine whether this pattern can forecast market direction a few days in advance.

As mentioned above, the S&P 500 index closed up every day of the week. This price action pattern has occurred 136 times since 1941. Since 01/2000 this pattern has occurred 31 times. Below is a backtest for entry at the close of Friday if the index is closes up every day of the week and exit at the close after two days. Note that weeks with holidays are not included.

There are 136 trades and the win rate is only 53.7%. However, from 1941 to 2000 this was a profitable strategy but equity reversed direction afterwards. This is consistent with the switch from positive autocorrelation to negative after the 90s as was discussed in several articles in this blog. Here is a more recent one. 

Therefore, based on a longer-term backtest, this unique pattern of the index being up every day of the week is random but based on a smaller sample since 2000 the expectation is negative for short-term long positions.

NASDAQ-100 gained 2.1 % on the week. Below is a weekly chart of the index.

Weekly momentum as measured by PAL OB/OS indicator is increasing but there is no signal of overbought market yet. In case of a major correction, the first support level may be around 9740, or more than 12% below current levels.

Despite the gains in tech stocks and the recovery in S&P 500, the Dow Jones Industrial Average closed on Friday 7.2% below the all-time closing high.

The reason the DOW 30 is lagging is that 14 stocks, or nearly half of the stocks in the index, are still in a bear market, as may be seen from the table below.

BA, WBA and XOM, for example, show significant losses from all-time highs. In comparison, 31% of NASDAQ 100 stocks are still in a bear market.

The Russell 2000 index close on Friday a little less than 10% below the all-time closing high after surging 6% on the week.

One possibility is that Dow 30 and Russell 2000 will eventually catch up and break above the all-time highs. The other possibility is that any hopes for advance are driven by wishful thinking and the false assumption that the stocks in these indexes should be following stocks in the tech indexes that are positioned to profit even under conditions of a pandemic. Soon may be indications of which scenario will dominate.

The average 120-day correlation of the returns of S&P 100 stocks with the index continued to fall slowly below 0.80. This is positive development as far as normalization.

Last week we wrote:

This may be the beginning of “normalization” of the correlation pattern although it is early to declare that. Next week we may have a better indication of whether this is the case and normalization is occurring. Normalization is important because it indicates lower risk.

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

Daily timeframe

There are no overbought/oversold conditions in the daily timeframe. NASDAQ is up 22.7% year-to-date and just 0.9% below recent all-time highs. Russell 2000 is down 6% year-to-date and 9.9% below all-time-highs after a 6% surge this week. The S&P 500 is up 3.7% year-to-date and 1% below all-time highs.

Weekly timeframe

There are no overbought/oversold conditions in the weekly timeframe according to PAL OB/OS indicator. NASDAQ rose 2.5% on the week to new weekly all-time highs.

4. Analysis of 34 popular ETFs.

Daily timeframe

ETFs are sorted by highest value of OB/OS period.

GLD and SLV are overbought in the daily timeframe for 15 and 14 days in a row, respectively. SPLV is overbought for 5 days in a row. XRT and TAN are overbought each for 4 days in a row. XHB and XLP have just turned overbought. SPY is about to become overbought. There are no oversold ETFs. XHB made new all-time high in daily timeframe.

SLV

SLV is becoming highly overbought and a violent reversal is possible but the ETF can rise near 30 before profit taking starts.

XRT

XRT could rise to 52 before it becomes too overbought.

Weekly timeframe

ETFs are sorted by highest value of PAL OB/OS indicator.

There are 11 overbought ETFs in the weekly timeframe including precious metals, materials, solar, homebuilder, commodity but also utilities and retail. Most overbought ETF in weekly timeframe is SLV for 6 weeks in a row. UUP is oversold for 5 weeks in a row. GLD, XRT, XHB, GDX, SPY, SMH, XLK, QQQ, XLV and XLB are at new all-time weekly highs.

TAN

TAN has risen into a resistance area after a 13.8% gain this week and is overbought in weekly timeframe for four weeks in a row. A pullback may follow soon.

5. Low volatility versus high beta large caps analysis

Low Volatility S&P 500 ETF (SPLV) rose 1.3% while the High Beta S&P 500 ETF (SPHB) surged 4.2% on the week.

The stock market rally was broad-based. Often, after a broad-based rally profit taking follows especially when uncertainty is higher.

6. Sector, factor, country and commodity ETF performance

Sector ETFs

ETFs are sorted by highest year-to-date return in daily timeframe.

XLP is overbought in the daily timeframe. There are no oversold sector ETFs. XLY made new all-time highs. XLE is in bear market mode with a loss of 53.9% from all-time highs (2014.)

Factor ETFs

ETFs are sorted by highest year-to-date return in daily timeframe.

Growth (IWF) is gaining 20.7%year-to-date and momentum (MTUM) is up 14%. Value (VLUE) is down 15.3% year-to-date followed by small caps (FNDA) at -13%. Factor ETF performance reveals concentrated rally in growth stocks while the broader market is struggling and that includes low volatility, high beta, high dividend and small caps. In other words, the trade is crowded. Low volatility (SPLV) is overbought for 5 days in a row.

Country ETFs

ETFs are sorted by highest YTD return in daily timeframe.

Taiwan and Sweden are up year-to-date 10% and 6.3%, respectively. Only 7 country ETFs are up year-to-date. Several country ETFs are in bear market territory including China, United Kingdom, Spain and Austria. Germany ETF moved in the black along with South Korea that gained 6% on the week but it is now overbought for 3 days in a row.

Commodity ETFs

ETFs are sorted by highest YTD return in daily timeframe.

Silver (SLV) and gold (GLD) are the top commodity ETFs year-to-date with 57% and 33.5% return, respectively. Coal (KOL) and gasoline (UGA) are at the bottom with -25% and -40% losses, respectively. SLV, GLD and NIB(Cocoa) are overbought in the daily timeframe for 15, 14 and 3 days, respectively.

7. Chart of the week

Top 20 S&P 500 growth stocks since 01/2010.

NFLX has delivered the highest total return growth since 01/2010 at $67.2 for each $1 invested followed by DPZ and DXCM and just above $50. AAPL is at sixteenth position with total return growth of $17 for $1 investment.

8. Conclusion

Normally, the market is getting near a short-term correction point. However, some things have changed from previous years: central banks are more active and there is new influx of speculators with dreams of quick riches. In 2017, for example, price action was dominated by quants with strict risk management criteria and volatility fell to all-time lows. At this point and after the influx of a large number of retail speculators, volatility is bound to increase. These speculators may not be “dumb money” but will act n that way eventually because of “all or nothing” mentality. When their actions will become erratic and their objective will start diverging, there will be temporary turmoil in the markets until these speculators are driven out. In our opinion this will occur towards the end of the year and into the first quarter of next year.

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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