Stocks Bounce On Earnings And Jobs Numbers
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Equities stormed out of the gate and left a dismal January in the rear-view mirror this week before the rally ran out of steam. A four-day win streak, the longest since December, off a series of strong earnings report, sent the DJIA up 1,468.55 points (+4.29%) and the NASDAQ a whopping 1064.77 points (+7.97%), before the bears had enough on Thursday, sending stocks sharply lower. Despite mixed trading as the week wrapped up, better-than-expected numbers from Exxon Mobil (XOM), Advanced Micro Devices (AMD), UnitedHealth Group (UNH), Amazon (AMZN) and Alphabet (GOOGL) helped offset mixed economic data and a rise in interest rates as the major averages were able to close higher for a second straight week. There were minefields however, as shares of PayPal (PYPL), Meta (FB), Clorox (CLX) and Ford (F) were punished for disappointing investors. Crude oil prices were on the rise, as inventories declined closing above $90 a barrel for the first time since 2014. The Energy (XLE) sector continued to outperform, jumping +4.98%, and has surged more than +24% y-t-d. Financials (XLF), Consumer Discretionary (XLY) and Healthcare (XLV) were also strong. Communication Services (XLC), REITs (XLRE) and Materials (XLB) finished lower. The CRB (Commodity) Index is on a five-day win streak jumping +3.5%, and hit its highest mark since late 2014 on Friday. A +13.54% spike in shares of Amazon.com and much better-than -expected jobs report as the week ended, kept the market above water as a volatile week came to a close with the NASDAQ turning in its best performance of the new year.
For the period, the DJIA added 364.27 points (+1.0%) and settled at 35089.74. The S&P 500 gained 68.68 points (+1.5%) and closed at 4500.53. The NASDAQ jumped 327.44 point (+2.4%) finishing at 14098.01, while the small cap Russell 2000 picked up 33.85 points (+1.7%), finishing at 2002.36.
Market Outlook: The technical condition of the market is mixed as the major averages bounced around key moving average (MA) support and resistance areas. The technical indicators for the DJIA, S&P 500 and NASDAQ improved, but remain for the most part, in neutral ground. Coming off an extreme oversold condition as January ended, the market was overdue for a bounce and has put together two-weeks of gains to remedy that condition. As of Friday, the DJIA, S&P 500 and Philadelphia Semiconductor Index are above their respective 200-day MA. The NASDAQ and secondary indexes, the DJ Transportation Index and small cap Russell 2000, remain below that level. However, at this stage it still looks like the four-day rally was nothing more than an oversold bounce. The market sectors continue to have a defensive slant as Energy (XLE) remains the strongest market group, while Consumer Staples (XLP) and Financials (XLF) are trading above their 50-day MA. Utilities (XLU) is above its 100-day MA. The Healthcare (XLV), Technology (XLK) and REITs (XLRE) sectors remain weak, but are above their respective 200-day MA. Internal breadth continues to show some negative divergence and is not indicative of higher prices, yet. The NYSE and NASDAQ Advance/Decline lines gained some ground, but Wednesday and Friday’s market gains came on negative to mixed breadth. New 52-week lows continue to outnumber the new highs on the NYSE and NASDAQ, but this week we saw more new highs than lows on two-days in the NYSE, which shows some improvement. Investor Sentiment is overly bearish but is backing off extreme levels. One exception is the Percentage of Investment Editors, followed by Investors Intelligence, expecting a market correction. That number hit 39.3% this week, its highest count since March 2020 when it reached 40.9%. That implies that most newsletters are still looking for the market to move lower.
Friday’s strong jobs report also showed wages rose about 7% and will keep the chatter going that the Fed could be more aggressive in raising rates. Higher oil prices are also inflationary and as of Friday, the CME FedWatch Tool projects a 36.6% chance that the Federal Reserve will hike rates .50% in March. That’s up from 2.2% the first of the year. While the selloff in anticipation of a rate hike has been painful, there may be more pain ahead. Historically, after an initial shock to the system as the Federal Reserve begins to raise rates, the stock market has gone through a period of limited gains after a brief correction. According to Goldman Sachs chief US equity strategist David Kosten, however, the S&P 500 has returned 5% in the six months following the first rate hike cycle. With the first hike in rates not expected until mid-March, investors may want to remain cautious a while longer before looking to add to positions.
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 +4, down two notches from the previous week. Cycles A, B, D and E are bullish, while Cycle C is bearish. The CTI is projected to remain positive for at least one or two more weeks.
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 Negative at -4, unchanged from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line added 920 units while the number of new 52-week lows exceeded the number of new highs on three of the five sessions. Breadth was also mixed at the NASDAQ as the A/D line gained 2620 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 jumped to 30.7% vs. 22.9% the previous week, while those above their 200-day moving average rose to 35.4% vs. 27.2%. 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 Positive at +4, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 2/03/22 shows outflows of $5.2 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 1/14/2022 (DJIA – 35911.81).
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