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Market analysis for week of October 18, 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 ETFs
  5. Commodity ETFs.
  6. Factor ETFs
  7. Spot currency pairs.
  8. Markets to Watch.

1. Weekly summary and recap

  • U.S. stocks were higher on the week after a strong rebound.
  • High beta large caps and low volatility large caps gained.
  • Bond prices were higher and yields fell.
  • The rally in commodities continued for an eight week in a row.
  • Gold was little changed. Crude oil moved higher.
  • The U.S. dollar index fell on the week.

Recap (October 11, 2021 – October 15, 2021)

Large caps (S&P 500) ended the week with 1.8% gain following a strong rebound. Tech stocks (NASDAQ-100) finished the week up 2.2%. Small caps (Russell 2000) gained 1.5%. The Dow 30 was up 1.6%. High beta large caps rose 2.1% on the week while volatility large caps added 1.5%. Bonds rose and yields fell. The rally in crude oil continued with spot rising 3.6%. Gold was unchanged. The CRB gained 1.6%. The U.S. dollar index ended the week down 0.1%. Year-to-date crude oil is up 70.5% followed by CRB index with 42.6% gain. Gold has year-to-date losses of 6.3% followed by Treasury Bond Total Return at -2.3%. The CRB index and crude oil are in overbought territory.

2. Analysis of major indexes

VIX fell 13.2% to close at 16.3.

Stock market dip buyers pushed implied volatility lower for a third time in a row after the all-time high in S&P 500 on September 2, 2021.

Last week I wrote

The stock market appears ready for a sell-off but a trigger is required.

Instead of a sell-off trigger, a dovish Fed sent broader market equity prices higher. VIX could drop to 15 before a rebound in implied volatility. Long volatility traders were hit hard this week and quite unexpectedly in some respects. The rally on Thursday with a 1.7% gain for S&P 500 left no room for maneuvering other than accepting the losses.

In financial social media some traders reiterated their claim that the market is manipulated.  Manipulation claims involve only rallies and never corrections and for this reasons they are one-sided misinterpretations of the facts.

The main driver of the stock market rally is a dovish Fed and the effect on prices is a side effect of monetary policy. The counter-argument is that the Fed should have already raised interest rates to counter inflation but the verdict is not out yet. In my opinion the Fed is taking huge risks at this point in case inflation is not “transitory”.

By the way, I rarely recall prices of finished goods ever falling significantly after rising even after commodity prices fall because, among other things, companies assume stable prices to make their forecasts. Prices of some items may fall but the general level of prices will remain unaffected. In addition, the Fed should have hedged against a low probability event of a bifurcation in inflation. Raising rates after a bifurcation occurs does usually little and could even amplify the effect on prices due to panic moves. But that is a very low probability event.

The U.S. dollar index closed at 93.94 and down 0.1% for the week.

Last week I wrote:

I expect a pullback from these levels but it may be short-lived.

In my opinion the pullback is not over yet and the US dollar index could drop towards 93.25 next week. A close above 94.6 could be a signal of continuation of the uptrend.

The yield of 10-Year Note fell three basis points to close at 1.58%.

Two weeks ago I wrote:

I expect continuation of the uptrend in yields except in the case of a large correction in the stock market.

A 10-Year Note yield at 1.75% is a matter of time and may not take too long. The high risks for long bond traders come from a low probability surprise interest rate increase in the order of 0.25%. It doesn’t appear this is priced in for the short-term since it’s a low probability event but these events could inflict large losses and these include both surprise cuts and rises in rates by Fed.

The CRB commodities index gained 1.6% on the week.

Last ago I wrote:

The rise in CRB index is mainly driven by energy. The energy group (crude oil, heating oil, natural gas and unleaded gas) has 48% weight in the index.

In case of a large correction in energy market the CRB index will also correct but while long as crude oil and natural gas are rallying the uptrend will remain in place. After the break above 230, there is potential for the index to reach 260.

Note that the CRB index is overbought for four weeks in a row in the weekly timeframe according to PAL OB/OS indicator. Also note that during the bull run of 2007 – 2008, the index never became overbought in the weekly timeframe for more than four weeks in a row, as shown in the bottom pane of the chart above. The maximum has been 10 weeks overbought during the 2009 – 2011 rebound.

The S&P 500 index rose 1.8% to close at 4471.37 for the week.

Last week I wrote:

The index low was at 4278.94 and there is high probability it will be retested in the next two weeks but maybe after a rebound continuation towards 4,450.

Despite the rebound, the index is still inside a five-week consolidation channel. This rebound was the result of a third round of dip buying after the all-time high of September 2, as shown in the daily chart below.

Some traders and investors are expecting new all-time high after the latest round of dip buying but there is always the possibility of a bull trap. In my opinion, prudent speculators wait for either new highs or a reversal to decide the direction to trade. Although payoff may be higher for those who act earlier, so are the risks.

Low Volatility S&P 500 index ($SP5LVI) gained 1.5% while the High Beta S&P 500 index ($SP5HBI) rose 2.1%.

Year-to-date, low volatility is up 11.4% versus a gain of 34.9% for high beta.

High beta large caps have been in an 18-week consolidation/rotation. At some point the market will choose a direction. The high beta large caps index chart may appear bullish but there is high uncertainty. I think the odds are higher for a short-term down move after the gain of last week.

3. Popular ETFs.

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

Energy (XLE) is overbought for six days in a row. Commodities (DBC) and crude oil (USO) are overbought for five days in a row. There are no oversold ETFs. Financials (XLF) made new all-time highs. Solar (TAN) gained the most on the week (+11%) while natural gas (UNG) fell the most (-2.8%.) Year-to-date natural gas (UNG) is gaining the most (+104.8%) while solar (TAN) is down the most (-15.2%) followed by silver (SLV) with losses of 12.2%. Note that all ETFs gained on the week except US dollar index (UUP) and UNG, the latter being the most volatile ETF with 14-day ATR at 5.7% of last closing price.

4. Asset ETFs

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

All asset ETFs gained on the week except the US dollar index (UUP). Commodities (DBC) are overbought for 5 days in a row. There are no oversold asset ETFs. There are no new all-time highs. Real Estate (VNQ) gained the most (+3.5%) while UUP fell the most (-0.3%.) DBC is up the most year-to-date (+47.5%) while gold (GLD) is down the most (-7.3%.)

5. Commodity ETFs

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

Gasoline (UGA) is overbought for six days in a row. Base metals (DBB) are overbought for three days in a row. Copper  (JJC) became overbought on Friday. There are no oversold commodity ETFs and no new all-time highs. Uranium (URA) gained the most on the week (+16.6%) while cocoa (NIB) fell the most (-6.2%.) Natural gas (UNG) is up the most year-to-date (104.8%) followed by URA at 79.7%, while palladium (PALL) is down the most (-15.6%) followed by silver (SLV) at -12.2%.

6. Factor ETFs

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

Factors had strong gains. Momentum (MTUM) gained the most on the week (+2.8%) and made new all-time highs since inception. Value (VLUE) is leading with 21.6% return year-to-dates and it is followed closely by size (SIZE) at 20.8%. The volatility factor trails behind the other five factors with a gain of 12.7% year-to-date.

7. Spot currency pairs

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

The Japanese Yen (JPY) is oversold for five days in a row. The Russian Ruble (RUB) is overbought.  All currencies gained on the week except JPY. The New Zealand dollar (NZD) gained the most on the week (+2.1%) while JPY fell the most (-1.8%.) RUB is up the most year-to-date (+4.1%) while Chilean peso (CLP) is down the most (-13.8%.)

8. Markets to Watch

Small Caps (IWM)

IWM shows potential of breaking out a 35-month long consolidation pattern and to the upside. A fall below 219 could be a signal of a failed breakout.

Rare Earths (REMX)

The strong rebound of last week could continue towards 128.

United States Oil (USO)

Last week I wrote

Prices have risen steadily towards the large down gap of March of last year. A break above 58.60 has higher probability after the action of last week.

After a break above 58.60 there may be a short-term correction in USO.

Solar (TAN)

Continuation of the strong rebound of last week in TAN is possible.

Emerging Markets (EEM)

Further gains towards 53 are possible after the bottom two weeks ago.

Silver (SLV)

Further gains towards 23 are possible in SLV.

Uranium (URA)

A short-term top may be in place for URA. Note that this ETF has sufficient liquidity with 5-day average volume around 3.7 million shares.

Australian Dollar (AUDUSD)

Further gains of AUDUSD are possible towards 0.7550.


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.


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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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