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Weekly Economic and Stock Market Commentary – April 26, 2021


As for the stock market specifically:

The major market averages ended little changed, but down for the week. It seemed that investors decided the weather was too good to ignore and went outside, and for a change, neglected the urge to make trades from the cell phone.

Earnings season started last week. As you know, I don’t subscribe to the correlation between earnings and stock prices. However, there are times when deviations from expected earnings result in large movements of a stock’s price.

The President is proposing changes to the tax code. It is too early for me to make investment decisions at this stage of the political process.

Simply put, the US budget continues to be a mess, and at some point, the debt must be repaid from tax revenue. The problem goes back to Rongo’s Rule of Taxes and Spending – our elected officials continue to find ways of spending $1.32 for every $1.00 of collected taxes.

What follows for the next few paragraphs is stock text that I present occasionally.

On the left, I highlighted a bullish chart pattern that I will call a double top break. This is a column of demand that exceeds the previous column of demand. The “signal” occurs when the stock shows demand (buyers) at $35.00.

The blue numbers and letters are used to tell time, 1 for January, 2 for February, etc., with A for October, B for November, and C for December.

On the right, I highlighted a bearish chart pattern that I will call a double-bottom break. This is a column of supply that exceeds the previous column of supply. The “signal” occurs when the stock shows supply (sellers) at $38.00.

The blue numbers and letters are used to tell time, 1 for January, 2 for February, etc., with A for October, B for November, and C for December.

The bullish percent is the number of stocks that have bullish patterns, nothing more, nothing less. It is calculated by counting the bullish charts and dividing that number by the number of stocks in a sector/market. Then multiply by 100 to get the percentage. A key item to remember is that all stocks that have traded for some time will be either bullish or bearish, not both.

About once a quarter I explain the difference between a market capitalization-weighted index, such as the S&P 500, and the “one-stock, one-vote” weighting of the bullish percents. Today is that day.The discussion comes down to a variation of this: “Why are the bullish percents increasing, but the numbers I see on TV are a little up, flat, or a little down?” Since this is election season, think of the difference in terms of the composition of Congress.

2 Answers

There are two basic answers. One potential answer comes from the nature of the bullish percent. It is based on the notion that a stock as large as General Electric counts as much as a stock of the size of the smallest stock on the NYSE. Think of the bullish percent like the US Senate – California counts as much as South Dakota.

The other potential answer stems from the composition of the index, such as the Dow Jones Industrial Average, S & P 500, or Nasdaq. The S & P 500 and the Nasdaq are known as capitalization-weighted. That means the largest companies in the respective index hold greater influence than the smaller companies. The metaphor here is for the US House of Representatives. There, California has approximately 52 representatives, while South Dakota has 1.

The bullish percent indicators fell a decent amount last week. They were beaten badly early in the week but did not recover. As a bit of good news, the short-term indicators started the week going up, went down mid-week, and closed the week back in the positive direction. WEALTH ACCUMULATION strategies remain in effect.

Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.

Below is where our indicators stand as of April 23, 2021 (Courtesy Dorsey, Wright, and Associates).

On a general note:

The National Association of Realtors provided the only bit of economic news to enter my inbox. The trade group reported existing home sales prices in March gained an astounding 17.2% from March 2020. The median home sale price in March 2021 came in at $329,100, which is a record high. The year-over-year gain is the highest gain on record, with the data going back to 1999.

Want more info? Email me at philip.rongo@ibexwealth.com.