Stocks Struggle to Hold Pre-Earnings Rally
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
| The major averages punched new record highs to start the week as investors counted on big Q2 earnings from big cap tech. Apple (AAPL), Microsoft (MSFT), Facebook (FB), Alphabet (GOOGL) and Advanced Micro Devices (AMD) all hit new highs on blowout earnings during the period, but struggled to hold onto the gains as the week wore on. A disappointing report from Amazon (AMZN) on Friday led to more profit taking and the ‘big guns’ finished the week mixed. The Federal Reserve did its part to help boost equities leaving interest rates unchanged at Wednesday’s conclusion of the July FOMC Meeting, reiterating that the committee was not considering raising rates or beginning to taper bond purchases. Yields on the 10 and 30-year T-Bill fell back to February levels after the Fed announcement with the 10-year closing at 1.23% and the 30-year at 1.89% on Friday. Also propping up the market was a bipartisan infrastructure deal that looked ready to pass on Friday which pushed the Materials (XLB) sector back above its 50 and 100-day Moving average as the ETF went on a nine-day win streak gaining +2.80%. Energy (XLE), Financials (XLF) and Healthcare (XLV) also outperformed, while Communication Services (XLC), Technology (XLK) and Consumer Discretionary (XLY) were the weakest sectors, the latter weighed down by weakness in Amazon (AMZN) on Friday. Commodities were mostly higher led by gains in tin and coffee prices and the CRB Commodity Index finished the period at another new record high. When the dust settled, despite record earnings, the major averages struggled to make any headway as investors weighed rising Delta variant cases that threatened growth, with concerns that earnings may have peaked in the second quarter. Ultimately, the major averages finished the week mostly lower but mixed.
For the period, the DJIA lost 126.08 points (-0.4%) and closed at 34935.47. The S&P 500 slipped 16.53 points (-0.4%) and settled at 4395.26. The NASDAQ dropped 164.31 points (-1.1%) to close at 14672.68, while the small cap Russell 2000 traded higher for a second straight week adding 16.60 points (+0.8%) finishing at 2226.25. Market Outlook: The technical condition of the market was mixed this week as new highs early gave way to profit taking ahead of the weekend. There was some deterioration in the technical indicators as MACD, a short-term trend gauge, was close to crossing into bearish ground for the major averages and momentum, as measured by the 14-day RSI, remained mostly positive, but was slowing. In addition, negative divergence was seen in the RSI for the S&P 500 and NASDAQ which could signal further weakness or consolidation ahead. There was also negative divergence in the underperformance of the DJ Transportation Index which is down -10.6% off its mid-May peak and was down -2% this week. Market technician’s would like to see relative strength in the transports in a healthy bull market. On a positive note, the small cap Russell 2000 outperformed for a second week gaining +0.8%, but has fallen back into its trading range and remains below both its 50 and 100-day moving average after failing to clear that resistance twice during the period. A break to new highs in the Russell 2000, which last recorded a new high in mid-March, would be bullish for the broader market. Positive divergence was also seen in the Philadelphia Semiconductor Index which closed at a new high on Friday. Internal breadth was mixed during the period as the NYSE Advance/Decline moved higher, but the NASDAQ A/D line finished lower and has been losing ground since mid-June. The number of new 52-week highs vs. new lows is also mixed. While the NYSE has seen the number of new highs expand the last two weeks, new lows exceeded the number of new highs on several days in the NASDAQ. After the market’s bounce back from its virus scare the previous week, investor bullish sentiment ticked higher again with the bull-bear ratios for retail investors and hedge funds managers expanding to bearish levels. However, the number of bulls in both camps remains below numbers put up a month ago. Next week the earnings parade continues and blowout numbers should keep supporting market prices. In addition, the Federal Reserve did its part in putting to bed fears that we could see a change in monetary policy anytime soon and should provide a floor under the market and curtail selling pressure. Despite some internal conflicting signals in the market, unless we see that we’re losing control of the Delta variant spread, the major averages look like they can work higher after consolidating gains from the pre-earnings rally as the economy moves closer to ‘normalcy’. The Delta variant risk may lead to increased volatility over the near-term, but market dips are likely going to be bought. 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 +14, up 24 notches from the previous week. Cycles A, B, C, D and E are bullish. As mentioned in last Friday’s Market Letter, the previous Monday’s low was most likely the bottom for this cycle. In order to reset the cycles, the DJIA needed to hold above 33741.76 this week. The CTI is now reset and will remain in a positive configuration into the fall. 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 -1, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 925 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was mixed at the NASDAQ as the A/D line gained 1561 units while the number of new lows beat the new highs on three days. Finally, the percentage of stocks above their 50-day moving average jumped to 48.2% vs. 37.3% the previous week, while those above their 200-day moving average rose to 75.8% vs. 73.1%. 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. In addition, we track money flows into and out of Equity Funds and ETFs which as of 7/28/21 shows inflows of $8.7 billion. Currently, the Sentiment Index is Negative at -2, 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 7/30/2021 (DJIA – 34935.47). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below.
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