Green, Yellow, Or Red Light For Stocks?

The mood in the stock market last week seemed to be driven by two different investment themes, and both were positive for stocks. Coming off the prior week’s dismal performance, when the S&P 500 lost 5.6% to close out October with its worst decline in seven months, there seemed to be a change in investor outlook starting on Monday. The S&P 500 opened 27 points higher on Monday and closed up 1.2% for the day. The new enthusiasm for stocks carried over into Tuesday, as the S&P 500 again opened higher, and gained another 1.8%.

The dominant explanation for this action has been that those exhausted by Trump’s handling of the economy put their faith in the promise of a landslide for the Democrats, a so-called “blue wave”. Stocks that thrived during those two days included renewable energy and value stocks, and it was also seen that yields went up.

However, it was clear by the evening that the election was not going to end with that “blue wave”. That did not stop the buying on Wall Street, however, as the S&P gapped higher on both Wednesday and Thursday, recording further gains. The buying during this period was attributed to the market’s conclusion that gridlock caused by the Republicans holding on to the Senate was good for stocks.

Despite some selling in Big Tech at the end of October, the Nasdaq 100 again led the markets last week, gaining 9.4%. The S&P 500 posted a 7.3% gain and is now just 2% below the record close of 3580.84. Both the Dow Jones Industrials and iShares Russell 2000 had solid gains of 6.9%, but both are still down slightly year-to-date (YTD).

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In my October 18 review of the NYSE All Advance/Decline analysis before and after the last four elections, I projected that new highs are likely before the end of the year, and that “the analysis of the prior election years does not rule out a 1-2 week correction either right before or just after the election.”

Historical analysis also warned that the volatility can be high, and Tuesday’s action clearly fit that description. This 15-minute chart of the S&P futures shows that they peaked at 3432 and traded above the starc+ band, indicating it was a high-risk buy just before 11:00 PM ET. By 3:00 AM on November 4, they had a low of 3319 and traded below the starc- band, before turning higher going into the open.

Even though the NYSE A/D numbers were negative on Friday, it was a solid week for the market internals. There were 2605 NYSE issues advancing and just 548 declining. I often use the data from this great WSJ page to teach market analysis, and it also shows that the advancing volume was more than double the declining volume.

The NYSE Composite was up 6.4% last week, and at 13,218 is just slightly below the September high of 13,350. The uptrend based on the October low (line a) at 12,293 is now a support level to watch. The NYSE All A/D line moved back above its weighted moving average (WMA) last week, a sign that the correction is over. The A/D line now looks ready to challenge its resistance (line b).

The daily chart of the Spyder Trust (SPY) shows that it has reached the downtrend from the September and October highs (line a). The modified Keltner channel that approximates the starc bands, which are not available on Stockcharts.com, was exceeded last Thursday and Friday. This means that the market is in a high-risk buy area, but that does not mean it can’t still go higher.

A strong move above $354 will complete the trading range and project an eventual move to the $380-$384 area. A doji was formed on Friday (red arrow), signaling some market indecision, so we may see a pullback early next week, but there is support at the 20-day exponential moving average (EMA) at $340.

The daily S&P 500 A/D line moved back above its WMA last Tuesday and has now surpassed its downtrend (line c). This is a positive sign. The bullish % from the American Association of Individual Investors rose 2.7 points to 38%, and now shows a solid uptrend (line d). It is positive that both this survey and the A/D line are in solid uptrends. If you would like to learn more about how to use sentiment data, read my previous article, The Technical Secrets Of Stock Market Sentiment.

The technical and sentiment data clearly means that it is a green light for stocks as we finish 2020 and move into 2021. However, there will be sharp setbacks along the way.

On a short-term basis, it is more of yellow-light market after last week’s gains. While the election has been called for Biden, Trump’s refusal to concede and his campaign’s promise of lawsuits in key states means that election-related volatility may continue. Additionally, I continue to be concerned that investors are ignoring the increased spread of COVID-19. The new increase in cases was part of the reason that stocks plunged in the last week of October, so it is important that investors not act complacent with regard to the ongoing pandemic.

In my Viper ETF Report and the Viper Hot Stocks Report, I update subscribers with market analysis twice per week, along with specific buy and sell advice. Each service is just $34.95 per month. New subscribers also receive six free trading lessons, a $49 value.

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