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Market analysis for the week of November 7, 2022. Major market indexes, ETFs, commodities, and forex. This report includes 18 charts and tables.

Report contents

  1. Weekly Summary.
  2. Chart of the Week.
  3. Market Performance Recap.
  4. Analysis of Market Indexes.
  5. Commodity ETFs and ETNs.
  6. Strategy ETFs.
  7. Spot Currency Pairs.
  8. Strategic Allocations.

1. Weekly Summary (October 31 – November 4, 2022)

  • Stocks fell amid rising uncertainty about Fed rate policy.
  • Bond prices fell and yields rose on the back of a hawkish Fed.
  • Commodities staged a strong comeback on the week.
  • The US dollar was little changed amid rising forex market volatility.

Large-cap stocks ($SPX) fell 3.3% but were off the lows of the week. The Dow 30 ($DJI) and small caps ($RUT) lost 1.4% and 2.5%, respectively. Tech stocks ($NDX) fell as much as 7.9% but recovered about 2% to close down 6%. The S&P 500 high beta index ($SP5HBI) dropped 2.9%. The S&P 500 low volatility index ($SP5LVI) shed 1.1%. The 14-day ATR of the S&P 500 index rose to 2.2% from 2.18% at the end of the previous week.

US Treasury Bonds ($SPBDUSBT) lost 0.8% on the back of a hawkish Fed. The 10-Year Note yield gained 15 basis points to 4.16%. Crude oil (@WTI) spot prices jumped 5.4%. Spot gold (@GC) ended the week with a gain of 1.6%. The CRB index ($CRB) surged 5.5% due to a broad commodities rally. The US dollar index ($USDX) was nearly unchanged for the week.

Year-to-date, the CRB index is up 23.7%, spot crude oil is up 22.9%, and the US dollar index is up 15.9%.

Total return equity indices

Year-to-date, the S&P 500 High Dividend Index is down 7.3% and down 14.6% from all-time highs. The Dow Jones Industrial Average total return index is down 9.3% year-to-date and 10.5% below all-time highs.

The S&P 500 total return index has fallen 19.8% year to date and is down 20.3% from its highs. The NASDAQ-100 total return is the worst-performing index, down 33% for the year and 34% below its all-time highs.

Note that last week there was no significant rotation into lower-risk securities, and all indexes fell in broad market selling. Given that there are no oversold conditions, volatility could rise next week.

The ensemble of our six systematic strategies is down 4.7% year-to-date, compared to a 21.3% loss for the S&P 500 index and a loss of 18.2% for the 60/40 portfolio with SPY and AGG ETFs. Our PSI5TF trend-following strategy with 24 futures contracts (long and short) is up 30% year to date.

2. Chart Of The Week

Financial media journalists and traders are trying to understand why tail risk hedging has not worked this year and why most schemes of buying out-of-the-money put options to protect against an equity market drop are losing money (for example, the TAIL ETF is down 10.9% year-to-date). The answer is that this year there have not been any volatility spikes, and volatility has remained relatively low despite the equity market losses.

In a mainstream financial media article, it was mentioned that the average daily return of the S&P 500 year-to-date is only -0.09%, and this is the reason tail risk strategies have been losing money.

As shown in the above chart, the 213-day moving average of daily returns was around -0.09% near the bottoms of past major bear markets and corrections. The recency bias of journalists and some traders is due to the GFC bear market when the 213-day moving average of daily returns fell to -0.30%.

At the same time, the bottom chart above shows the lack of a spike in the realized 21-day annualized volatility this year. Under these conditions, tail-risk strategies are losing money even though the market is in a downtrend.

3. Market Performance Recap

Sectors ETFs

Most sectors fell this week except energy (XLE), materials (XLB), and industrials (XLI). XLE gained the most (+2.4%). Communication Services (XLC) fell the most (-6.8%).

The Energy ETF (XLE) is up 70% year-to-date. All other sectors are down year-to-date. Technology (XLK) and communication services (XLC) are down 29.9% and 40.7%, respectively.

Uptrend Consolidating Short-Term Uptrend Downtrend
XLE  XLY, XLV, XLP, XLK XLB, XLU, XLI, XLF, XLRE XLC

XLE

Last week I wrote:

The XLE ETF is down 1.1% from all-time highs. Another top around these levels is possible, but if the ETF breaks above 92, then a new uptrend could start.

The XLE ETF reached a high of 93.02 but ended the week at 91.42. A break above last week’s high at 93.02 could be a confirmation of a continuation of the uptrend.

Assets ETFs

The performance of eight asset ETFs is included below.

Asset ETFs gained on the week except for US equities and bonds. Emerging markets (EEM) gained the most (+5.6%), while stocks (SPY) fell the most (-3.3%).

Equities (SPY, VEU, and EEM) are down in the range of 19.8% to 25.3%. Gold (GLD) is down 8.5%. Crude oil (USO) is up 41.3% year-to-date but is off the highs of the year at 69%. Commodities (DBC) are up 27.9% after being up 46.9% in early June of this year. Bonds (TLT) are down 35.2% and have been oversold for three days.

Consolidating Trending Down Short-Term Uptrend
GLD, TLT, SPY, DBA USO, DBC, EEM, VEU

Factors

The performance of six factor ETFs is shown below.

All factors fell during the week. Growth (IWFE) fell the most (-5.6%). VLUE is outperforming growth (IWF) and quality (QUAL) by a margin of about 17% and 10%, respectively.

Consolidating Trending Down Short-Term Uptrend
MTUM, VLUE, IWF, USMV, QUAL, SIZE

4. Major Market Indexes

The S&P 500 index fell 3.3% to end the week at 3,770.55

Last week I wrote:

There is a strong attractor near 4,090. Given the technicals and the expectations, the odds are high that the attractor at 4,090 will be tested in the next two weeks.

The attractor near 4,090 is still strong, and the weekly chart is bullish in the short term. However, a drop below 3,700 will activate an attractor at around 3,600. This could be a setup for a long straddle or long strangle option play.

The CRB Index surged 5.5% to end the week at 287.55.

This was the least expected move by traders, as the focus was on equities and bonds, and the prevailing thesis was that a downtrend in commodities was about to start.

Despite the broad-based rally in commodities, this market is still in a consolidation phase. Momentum is increasing, according to the PAL OB/OS indicator. A break above the 40-week moving average at 291.20 could be a signal of a test of the 300 level. However, a new uptrend has low odds.

5. Commodity ETFs and ETNs

Commodities staged a broad-based rally. Only palladium (PALL) and uranium (URA) were down on the week. The Natural gas ETF (UNG) gained the most (+11.4%). The URA ETF fell the most (-2.1%). There are no oversold or overbought commodity ETFs.

Year-to-date, the natural gas ETF (UNG) is up the most (+66.7%). The coffee ETF (JO) is down the most (-19.8%).

Based on 14-day ATR as a percentage of the closing price, the most volatile ETF is UNG at 6.6%.

Copper (JJC)

The copper ETF (JJC) surged 8% on reports of falling inventories. The short-term uptrend could continue towards 20.

Corn (CORN)

A 10-week consolidation may end with an up move towards 29. The support is around 26.7, near the 40-week moving average.

6. Strategy ETFs

The KFA Mount Lucas Index Strategy ETF (KMLM) gained the most (+2%). The Wisdom Tree US Efficient Core ETF (NTSX) fell the most (-4.3%).

The top performer year-to-date is the KMLM ETF (KMLM) with a gain of 43.8%, and the worst performer is NTSX with a loss of 28.3%.

iMGP DBi Managed Futures Strategy ETF (KMLM)

This ETF has been consolidating for four weeks and shows signals of topping out in the short term.

7. Spot currency pairs

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

Currencies were mostly up against the US dollar for the third week in a row. The Brazilian Real (BRL) gained the most (+4.2%). The British Pound (GBP) fell the most (-2.1%). The Mexican peso (MXN) is overbought. The Malaysian Ringgit (MYR) has been oversold for 38 days.

The RUB is up the most (+22.2%) year to date, while the Japanese Yen (JPY) is down the most (-21.5%). The only other currencies that are up year-to-date are the Brazilian Real (BRL +9.9%) and the Mexican Peso (MXN +5%).

The US Dollar index is up 15.2% year-to-date.

Of the major currencies, the Japanese Yen is down the most versus the US dollar (-21.3%), while the Canadian dollar (CAD) and the Swiss Franc (CHF) are down the least, 5.5% and 7.6%, respectively.

Based on 14-day ATR as a percentage of the closing price, the most volatile currency is the RUB at 4.4%.

8. Strategic Allocations

60/40 allocation in SPY and AGG ETFs

The 60/40 portfolio (60% in SPY and 40% in AGG) is down 18.2% year-to-date as a result of falling bond and stock prices (AGG is down 15.8% and SPY is down 19.8% year-to-date). The portfolio’s short-term trend is sideways

60/40 allocation in SPY and DBMF ETFs

This DBMF ETF is up 32.5% year-to-date. The 60/40 portfolio in SPY and DBMF ETF is up 1.1% year-to-date versus a loss of 15.8% for the traditional 60/40 stocks/bonds allocation with SPY and AGG ETFs.


Notes:

-Overbought conditions occur in the daily timeframe when RSI(14) indicator is greater than 70 and oversold when the indicator is less than 30. The length of overbought/oversold conditions in days is also shown.
-Overbought conditions occur in the weekly timeframe when the PAL OB/OS indicator is greater than 95 and oversold when the indicator is less than 5. The 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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