The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).

Stocks Finish Week Mixed on Mideast Conflict

The major averages battled both high yields, as inflation data ticked higher in September, and rising tensions in the Mideast this week but finished the period mixed. Equities were on the rise to start the week as Wall Street shook off the Israel-Hamas conflict and rates inched lower on a move to safety and dovish comments from Fed officials that a pause in rate hikes in November was being considered. Two days of hotter-than-expected inflation data in the PPI and CPI saw Wall Street waver and trade on both sides of the breakeven line before the different indexes faded into the close on Friday. Despite Q3 earnings season kicking off with positive reports from the Money Center banks and UnitedHealth Group (UNH) investors moved to the sidelines as Mideast tensions escalated. The market sectors were mixed with Energy (XLE) the best performer as crude oil prices reversed their recent selloff on supply uncertainty. Utilities (XLU), REITs (XLRE), Industrial (XLI) and Financial (XLF) also outperformed. Consumer Discretionary (XLY), Materials (XLB), Healthcare (XLV) and Consumer Staples (XLP) were the laggards. Rates were little changed but eased on the week with the two-year T-Bill briefly dipping below 5% before closing at 5.04%, while the 10-year Treasury landed at 4.627%. As of Friday, the CME Group FedWatch projects a 92.4% probability of the Fed leaving rates unchanged at the November FOMC Meeting. Bond traders are less confident of a pause in December with 29.6% looking for a 0.25-point hike. Investors were cautious going into the weekend but the DJIA was able to snap a three-week losing streak, while the S&P 500 was higher for a second straight week. The NASDAQ was lower for the first time in three weeks.

For the period, the DJIA gained 262.71 points (+0.8%) and settled at 33670.29. The S&P 500 added 19.28 points (+0.4%) and closed at 4327.78. The NASDAQ eased 24.11 points (-0.2%) finishing at 13407.23. The small cap Russell 2000 lost 25.85 points (-1.5%) finishing at 1719.71.

Market Outlook: The technical condition of the market is mixed this week as the major averages closed mixed in back-and-forth trading. After testing and holding key support levels the previous week, triggering an end of week rally, the major averages held above previous lows but were unable to cross through key moving average resistance levels. The technical indicators are mixed with MACD, a short-term trend gauge, now bullish for the DJIA, S&P 500 and NASDAQ, but Momentum, as measured by the 14-day RSI, is neutral. Stochastics show those indexes are no longer oversold and the Market Edge/S&P Short Range Oscillator (SRO) finished the week in neutral ground at -2.27%. The secondary indexes, which include the DJ Transportation Index, the small cap Russell 2000 and Philadelphia Semiconductor Index all lagged the broader market which is a negative going forward. Another concern is that the major averages are still involved in a bearish pattern of lower highs and lower lows that extends back to July. Until that pattern is broken, or until we see the different indexes break above downward sloping trend lines, investors shouldn’t be counting on a year-end rally. Despite mixed signals, the DJIA was able to stay above last week’s low of 32846.94 which led to a reset of the Market Edge CTI, a proprietary market timing indicator, to a bullish configuration. It should be noted however, that the longer-term cycles are still negative, and upside could be limited over the near-term. In addition, the CTI is projected to return to a negative posture in the latter half of November.

Underlying breadth is mostly negative. Although the NYSE Advance/Decline line moved slightly higher, the NYSE and NASDAQ A/D lines have been in a steady decline since mid-July showing broad distribution in equities. The NYSE A/D line is considered a leading indicator of market direction and will usually turn higher or lower ahead of a top or bottom. New 52-week lows continue to outnumber the new highs on both exchanges, but we saw a sharp contraction in the new lows leading up to Friday. The NYSE recorded more new highs than lows on Tuesday for only the second time since mid-August. Finally, Investor Sentiment saw an uptick in bullishness this week. The American Association of Individual Investors shows retail bulls jumped to 40% from 30.1% the previous week, above the historical average of 37.5%. The pros also added to equities with the National Association of Active Investment Managers (NAAIM) Exposure Index increasing to 45.8 from 36.2, while the Percentage of Bullish Investment Advisors rose to 48.6 from 42.3 the prior week.

A chart of these indicators can be found by going to the Market Edge Home page and clicking on Market Recap, which is on the right-hand side of the page just below the Second Opinion Status numbers.

Cyclical Trend Index (CTI): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times. Currently, the CTI is Positive at +2, up 12 notches from the previous week. Cycles A, B and C are bullish, while Cycles D and E are bearish. The CTI now carries a bullish connotation but it should be noted that upside could be limited as there will still be downside pressure on stocks as dominant long term Cycles D and E are bearish and the CTI is projected to return to a bearish reading at the end of November.

Momentum Index (MI): The market’s momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish. The Momentum Index is Neutral at +2, up eight notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line added 450 units while the number of new 52-week lows exceeded the number of new highs on four of the five sessions. Breadth was negative at the NASDAQ as the A/D line lost 2198 units while the number of new lows out did the new highs on each day. Finally, the percentage of stocks above their 50-day moving average rose to 23.4% vs. 16.0% the previous week, while those above their 200-day moving average increased to 34.0% vs. 31.6%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.

Sentiment Index (SI): Measuring the market’s Bullish or Bearish sentiment is important when attempting to determine the market’s future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. The Sentiment Index is Negative at -1, down two notches from the previous week.

Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 10/13/2023 (DJIA – 33670.29).

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