Market Summary

NASDAQ Vacillates but Outperforms DJI and S&P 500

We reported last week that investors had adjusted to the new expectation that interest rates will remain steady this year and that growth stocks were back in favor. That prediction looked a little shaky on Tuesday when our market model again reversed itself for the NASDAQ but low increases in the core producer price index and consumer price index reassured the markets that an interest rate rise would not be necessary to control inflation and two solid days of gains caused the model to reverse itself yet again on Friday. For the week, the NASDAQ Composite easily outperformed the other major indexes with a 2.07% gain while the DJI rose 1.6% and the S&P 500 gained 1.67%.

Although the NASDAQ made solid gains, volume was disappointing until Friday when it jumped up to 21% above the 50 day average. Volumes on the broader market were also up sharply on Friday. While this would normally be a sign of increasing confidence, Friday was also a 'quadruple witching' day which always generates much higher than normal volumes. Nevertheless, with two successive reports of tame core inflation at the producer and consumer level, Investors are now reassured that the interest rate environment will be stable for the foreseeable future.

The consumer is not so reassured however as they pay a higher price for food and gas. The overall increase in the CPI was a higher than expected 0.7% month-on-month and the effects of a higher cost of living were evident in a fall in consumer sentiment as measured by the University of Michigan. The short term effect of higher food and energy costs is to reduce discretionary spending which acts as a break on the economy so there is no need for the Fed to act to curb the higher headline inflation number.

The conditions for breakouts continue to be favorable. Of 23 breakouts this week, only 1 failed to show a profit by week's end, with a small loss of 0.24%, and the average gain was 3.35%. Our 'Top Tip' this week shows how to select the most successful breakouts based on recent market conditions.

There were no new features added this week.

The Best Filters for Recent Market Conditions

Our backtest feature on the CwH watchlist provides you with a tool to identify the filters that work best in recent market conditions. The backtest feature and its use is described here.

We've done our own analysis for you and found that since April 1, the approximate date of the most recent upwards trend, the filters that select the best Cup-with-Handle breakouts are quite simple:

CET >= 6, UpDownRatio>=0.5, Industry_rank_CT<=25.

This set of filters beat the average return of all breakouts over the last 75 days by 51.5%. The filters would have given you 21 alerts with 7 breakouts confirmed. The average gain to the high since breakout would have been 23.6%, AND there would have been zero failures (a failure occurs when a breakout falls by more than 8% from its breakout price).

This result surprises us, because it is contrary to the trend we have seen over the 6 years we have operated the site in that industry rank (based on technical not fundamental criteria) has taken on an importance not previously seen. It reflects that in the uncertain market we have seen recently, investors have preferred 'quality' stocks over speculative issues. It is also notable that of the seven successful breakouts selected by these filters, only two were listed on the NASDAQ, which is consistent with the recent trend. the seven stocks are:

Investment Advisors Using our Service

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