Bulls Battle Back
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
It was a wild week on Wall Street as global markets plunged on reports that Russian troops invaded Ukraine, before stocks staged a massive reversal rally that left the major averages mostly positive at Friday’s close. Skittish investors sold risk assets and moved into safety trades early in the week with the small cap Russell 2000 falling into a Bear market on Tuesday. Gold prices soared, hitting a one-year high of 1911.90 an ounce, crude oil prices topped $100 a barrel, and Treasury yields fell on fears that the invasion would lead to a larger conflict in Europe. The different indexes gapped sharply lower on Thursday, but investors scooped up oversold equities after weighing what affect the Russia/Ukraine conflict and imposed sanctions would have on the US economy. The major averages rallied into the close and erased early losses, closing at the highs of the day. The reversal picked up steam on Friday as Russian President Putin signaled he would return to the negotiating table, and the different indexes close out the week on a high note. The rally was broad based led by gains in Healthcare (XLV), REITs (XLRE), Utilities (XLU) and Communication Services (XLC), while Consumer Discretionary (XLY), Consumer Staples (XLP) and Financials (XLF) lagged. Commodity prices eased as the period ended with crude oil prices settling at $92.34 a barrel, and gold at $1981.50 an ounce, as traders kept an eye on Europe. As the week ended, investors looked ahead to a heavy calendar of economic data, more earnings, and a two-day testimony before Congress by Fed Chair Jerome Powell on monetary policy.
For the period, the DJIA eased 20.43 points (-0.1%) and settled at 34058.75. The S&P 500 added 35.78 points (+0.8%) and closed at 4384.65. The NASDAQ gained 146.55 points (+1.1%) finishing at 13694.62. The small cap Russell 2000 picked up 31.60 points (+1.6%), finishing at 2040.93.
Market Outlook: The technical condition of the market was mixed this week as the major averages reversed a sharp selloff to finish mostly positive. The technical indicators for the different indexes are in neutral ground having improved going into the weekend. MACD, a gauge of the short-term trend, had a bullish cross for the DJ Transportation Index, Russell 2000 and Philadelphia Semiconductor Index, while Momentum, as measured by the 14-day RSI, is neutral but gaining strength, which bodes well for the market going forward. In addition, we saw positive divergence in the 14-day RSI for the indexes, whereas the indicator made a higher low on Thursday, while prices made a lower low. The market worked off some of its oversold condition, with stochastic readings rising back above 20, but remained oversold by several measures. Going into Friday, the percentage of stocks trading above their 50 and 200-day moving average (MA) had fallen below 28.5%, an oversold condition. Despite the rally to end the period, the major averages remain below their 200-day MA. The S&P 500 also has resistance at a downward sloping trend line at 4460, which is in line with its 200-day MA, while the NASDAQ runs into a downward sloping trend line at 13808. Those levels could see the market bounce stall at those levels. On a positive note, secondary indexes the Philadelphia Semiconductor Index, DJ Transportation Index and Russell 2000 outperformed the broader market for a second straight week. Market technicians would like to see these indexes lead the market higher. Internal breadth remains weak however, with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, showing most stocks remain under distribution. The number of new 52-week lows continued to expand, but we did see a sharp drop off in the number on Friday. Finally, investor sentiment reached an extreme level of bearishness at Thursday’s open. The Market Edge Sentiment Index jumped to a +6, its highest reading since the first week of April 2020. Sentiment indicators are used as contrarian indicators when they touch extreme levels, and the high degree of bearishness is another sign that Thursday’s intraday low could be a short-term bottom.
The Russian invasion sent shock waves through global markets this week but has been the case historically, these events tend to be short-lived. Although this week’s turnaround could end up being nothing more than an oversold bounce, there are indications that the worst is behind us. Investors’ attention will now return to inflation and whether the Federal Reserve’s response could trigger a Bear market. Next week Fed Chair Jerome Powell will testify before Congress on the path for monetary policy and market participants should get a clearer picture as to whether the Federal Reserve will raise rates on Treasuries a 0.25 or 0.50 point at the March FOMC Meeting the following week. Investors can debate whether the Russia/Ukraine conflict will influence the Fed’s decision but as of Friday the CME FedWatch projects only a 25% chance of a 0.50 hike, down from 97% a little more than a week ago. That also supports the case that we’ve seen a near-term bottom.
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 +1, down three notches from the previous week. Cycles C, D and E are bullish, while Cycles A and B are bearish. The CTI is expected to reset to a positive count next week if the DJIA stays above this week’s low of 32272.64.
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 -6, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 815 units while the number of new 52-week lows exceeded the number of new highs on all four sessions. Breadth was also negative at the NASDAQ as the A/D line fell 1637 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 dropped to 27.9% vs. 37.5% the previous week, while those above their 200-day moving average fell to 28.5% vs. 35.8%. 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 2/23/22 shows inflows of $254 million.
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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