The stock market (and the rest of us) finally got the news it has been waiting for since the summer. The very positive results on Pfizer’s COVID-19 vaccine gave the already-strong stock market a boost before the opening Monday. S&P futures went from being up 60 points to up 120 points by the open.
While the potential vaccine and some pent-up bullishness were major factors in Monday’s strong open, short-covering was also likely a factor. The CBOE Index Put/Call ratio closed at 2.00 on Friday, November 6, with a call volume of 646,825 and a put volume of 1,290,540. This was a sign that some traders in the index options were too bearish before the week started.
Monday’s strong open pushed the Dow Jones Industrial Average up 1600 points during the day; however, it was still a mixed week for the markets. The iShares Russell 2000 (IWM) led the averages, up 6% for the week, followed by 4.1% gains in both the Dow Jones Industrial Average and the Dow Jones Transportation Index.
The Dow Jones Utility Average bested the S&P 500 this week, up 3.3% compared to the 2.2% gain for the S&P. The SPDR Gold Shares were hurt by the vaccine news, dropping 3.3% for the week. The technical outlook for gold indicates the closing level for November will be important. The Nasdaq 100 was also lower, losing 1.3%.
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Given how stocks started off the week, it was expected that the bullish% in the American Association of Individual Investors (AAII) survey to increase from the November 5 reading of 38%. Few were expecting it to surge 17.9 points to 55.8%, which was the highest reading since the January 4, 2018 reading at 59.7%.
The chart shows that it was as low as 22.1% in early July and on September 10 stood at 23.7%. Most of the change came from those in the neutral% which declined 11.3 points this past week to 19.3%. The bearish% peaked on September 10 at 48.4% and has been declining since then, closing at 24.9% last week. By comparison the bearish% on January 4, 2018 was 15.5%.
Coming off the low bearish% readings in January 2018, the S&P 500 moved higher for the next three weeks, peaking on January 26, before undergoing a double-digit correction. As the weekly chart shows, the Spyder Trust (SPY) traded above its weekly starc+ band for four weeks in 2018 (point a) before it corrected.
The weekly starc+ band was not exceeded last week and stands at $372.04 for the week ahead. There is first weekly support in the $350-area with the rising 20-week exponential moving average (EMA) at $333.26. The S&P 500 Advance/Decline line made another new high last week and continues to lead prices higher. It had made a new high in early October, which forecasted a new high for the S&P 500 and SPY. The A/D line shows a positive trend since early 2019 (line b).
The wide range of performance last week was even more dramatic in the sectors. The top performer was the Energy Sector (XLE) which was up 17.1% for the week, while the Technology Sector (XLK) was the worst-performing, down 0.3%. Though crude oil was also up 8% for the week, it will take more than one week of strong action to turn the monthly crude oil analysis positive.
The Financial Sector (XLF) was also strong last week, up 8.3%, and there were over 5% gains in the Industrial Sector (XLI) and Real Estate Sector (XLRE). Of course, one gets a dose of reality when you look at the year to date (YTD) performance: XLE is down 40.6%, and XLF is down 10.4%, so these two high-performers from last week have been two of the weakest sectors since the March decline.
The other 2020 market-leading sectors Communication Services (XLC) and Consumer Discretionary (XLY) were just barely higher for the week, but are showing over 20% gains YTD.
The weekly sector performance reveals that the typical value sectors were favored over growth sectors. In October, I looked at the relationship of growth and value by looking at the ratio of the iShares Russell 1000 Growth (IWF) to the iShares Russell 1000 Value (IWD). A higher ratio means better performance by growth stocks, while a lower ratio means better performance by value stocks.
The daily chart shows that the ratio has been quite volatile in November. The downtrend (line a) was briefly overcome on November 5 but that was followed by a plunge below the support (line b). The November 10 low was the lowest level for the ratio since July 23. The daily trend in the ratio is now downward, and it would take a close above the November high of 1.8630 to turn it positive again.
The daily Moving Average Convergence-Divergence (MACD) had formed a negative divergence in September (line c) and dropped sharply last week. The MACD-Histogram started making lower lows in October and is decisively negative.
Yields last week were higher, as the 10 Year T-Note Yield reached a high of 0.975% and closed the week at 0.893%. The downtrend from the 2018 high (line a) was reached. The resistance at 0.957% (line c) was overcome during the week, and there is much stronger resistance at 1.258% (line b).
The MACD for the 10 Year T-Note Yield has broken its longer-term downtrend (line d), as it has been been rising more sharply than yields since it turned positive in June. The MACD-Histogram has been holding well above the zero line, but does not yet show any increase in upside momentum. The financial media is focusing on the 1.000% level, and a decisive move above this level should get the market’s attention.
There is a full slate of economic reports this week, including the Empire State Index, Retail Sales, Housing Starts, the Philadelphia Fed Index, and Leading Indicators. A number of these reports may move yields this week.
So is now the time to jump into value stocks and sectors? I continue to think there will be a turn in favor of value in the next year or so. While it is possible that the turn has started now, these type of changes take time. As pointed out in this Washington Post article, one well-known value manager who started in 1984 is closing his fund at the end of the year. Only time will tell whether he is getting out at the wrong time.
The bullish readings from the market technical studies favor higher prices into 2021, but the high bullish sentiment and increasing overbought market status does not favor chasing prices in the weeks ahead.
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