The Federal Reserve balance sheet has been expanding since August 2019. Back then the balance sheet totaled $3.76 trillion. On March 22 it was up to $7.72 trillion. As the Fed increased total assets, the stock market traded higher. This should continue as the first quarter of 2021 ends this Wednesday.
The Dow Jones Industrial Average (.DJI) and Dow Jones Transportation Average (.DJT) set all-time intraday highs on Thursday, March 18 at 33,227.78 and 14,364.35, respectively. These highs were just below their annual risky levels at 33,425 and 14,424. The S&P 500 (.SPX) set its all-time intraday high of 3,983.87 on March 17, above its annual risky level (now a pivot) at 3,932.
Nasdaq Composite (.IXIC) set its all-time intraday high of 14,175.12 on February 16. Its monthly risky level for March is 14,195. The Russell 2000 Index (.RUT) set its all-time intraday high of 2,360.16 on March 15. This is well above its annual and monthly risky levels at 2,120 and 2,193.
Performance among the averages is quite different. The Russell 2000 is up 12.5% year-to-date compared to the Nasdaq up just 1.9%. The Nasdaq is 7.3% below its high.
Here’s today’s scorecard:
The weekly charts are no longer positive.
By definition, a weekly chart is positive when an index is above its five-week modified moving average (MMA) with its 12-week slow stochastic reading rising between 20.00 and 80.00. A reading above 80.00 is overbought. A reading below 20.00 is oversold.
The weekly chart for the Dow Jones Industrial Average is positive but overbought. The average above its five-week modified moving average at 31,889. Its 200-week simple moving average lags at 25,904. The 12-week slow stochastic reading is overbought at 85.34. My proprietary analytics show quarterly and semiannual pivots at 31,052 and 31,459 with an annual risky level at 33,425.
The weekly chart for the S&P 500 is positive but overbought. The index is above its five-week modified moving average at 3,881.43. Its 200-week simple moving average lags at 2,948.35. The 12-week slow stochastic reading declining at 78.53 moving below the overbought threshold of 80.00. My proprietary analytics shows a semiannual value level at 3,511.43 with a quarterly pivot at 3,836.19, and an annual risky level at 3,932.35.
The weekly chart for the Nasdaq Composite is negative. The index is below its five-week modified moving average at 13,238.20. Its 200-week simple moving average lags at 8,510.82. The 12-week slow stochastic reading is declining at 54.19. The Nasdaq was in an inflating parabolic bubble with a reading above 90.00 in mid-February. My proprietary analytics shows quarterly, annual and semiannual value levels at 12,789.26, 12,000.71, and 10,972.72.
The weekly chart for the Dow Jones Transportation Average is positive but overbought. The average is above its five-week modified moving average at 13,685.00. Its 200-week simple moving average lags at 10,509.38. The 12-week slow stochastic reading is overbought at 91.49. This reading is above 90.00, putting the average in inflating parabolic bubble formation. My proprietary analytics shows semiannual, and quarterly pivots at 12,314.56 and 12,003.69, with an annual risky level at 14,424.55.
The weekly chart for the Russell 2000 is positive but overbought. The average is above its five-week modified moving average at 2,216.50. Its 200-week simple moving average lags at 1,579.00. The 12-week slow stochastic reading is overbought at 84.01. At the high this average had a reading above 90.00, making the Russell 2000 an inflating parabolic bubble. My proprietary analytics shows quarterly and semiannual value levels at 1,840.34 and 1,711.55, with an annual pivot at 2,120.34.
The closes on December 31, 2020 were inputs to my proprietary analytics and resulted in monthly, quarterly, semiannual and annual levels. Each uses the last nine closes in these time horizons. The monthly level thus changed in February and March.
New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.
To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
The stochastic reading covers the last 12 weeks of highs, lows and closes. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an inflating parabolic bubble formation that is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered as being too cheap to ignore which typically is followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.