Stocks Lower As Russia-Ukraine War Escalates
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The previous week’s strong reversal as Russia and Ukraine headed to the negotiating table faded this week with global markets sharply lower as the conflict escalated. European markets tumbled another 4-5% on Friday ahead of the weekend with record outflows from equity funds during the week. The different US indexes struggled throughout the period as well, as crude oil prices spiked above $115 a barrel, last seen in 2008, while gold, energy and commodity prices also soared. Copper prices hit a new all-time high on Friday helping to send the CRB (Commodity) Index to a new record high, surging almost 10% off Tuesday’s intraday low. Yields dropped back with the rate on the 10-year Treasury falling to 1.707% before landing at 1.73% despite Fed Chair Jerome Powell commenting that the Federal Reserve would raise rates a 0.25-point at the March FOMC Meeting. The Fed Chair’s semiannual testimony on monetary policy before Congress reversed a big drop in equities on Wednesday, but investors sold the rally as the week ended. The yield curve flattened as investors worried over the impact the Russian invasion would have on global economies. Energy (XLE) was again the strongest market sector jumping +7.04%, while defensive sectors Utilities (XLU), REITs (XLRE) and Healthcare (XLV) also outperformed. Financial (XLF) was the weakest group sinking -4.78%, while growth sectors Technology (XLK), Communication Services (XLC), and Consumer Discretionary (XLY) were all down more than -2.5%. Investors were reluctant to buy Friday’s dip as war raged in Ukraine and the selloff left the major averages lower with the DJIA down for a fourth consecutive week.
For the period, the DJIA fell 443.95 points (-1.3%) and settled at 33614.80. The S&P 500 gave up 55.78 points (-1.3%) and closed at 4328.87. The NASDAQ dropped 381.18 points (-2.8%) finishing at 13313.44. The small cap Russell 2000 tumbled 40.03 points (-2.0%), finishing at 2000.90.
Market Outlook: The technical condition of the market deteriorated this week in back-and-forth trading that left the different indexes red. The technical indicators remain weak with Momentum, as measured by the 14-day RSI, neutral to bearish, and moving lower. MACD, which measures the short-term trend, was also declining with bearish crossovers in the S&P 500, NASDAQ and Philadelphia Semiconductor Index. Most of the major averages remain below their respective 200-day MA, a bearish condition. The exceptions are the DJ Utilities and DJ Transportation Index with the Utilities punching a new record high on Friday, while the transports moved higher on strength in railroads and trucking stocks. Market weakness is across several sectors with Communication Services (XLC), Consumer Discretionary (XLY), Financials (XLF), Industrials (XLI), Technology (XLK) and Materials (XLB) all below their 200-day MA. Defensive sectors Consumer Staples (XLP), Healthcare (XLV) and REITs (XLRE) are trading above their 200-day MA. Utilities (XLU) and of course Energy (XLE) at or near new highs. Internal breadth remains weak with the NYSE and NASDAQ Advance/Decline lines both trending lower showing most stocks remain under distribution. In addition, new 52-week lows continue to outnumber new highs, and on the NASDAQ, they have for 16 straight weeks. Investor sentiment is at extreme levels of bearishness, which is often found at market bottoms. While the American Association of Individual Investors (AAII) survey bottomed two-weeks ago, only 30.4% of retail investors are bullish. Hedge funds and professionals are much more cautious. The Percentage of Bullish Investment Advisors fell to 29.9% this week, which is below the 30.1% hit in March 2020. In addition, the National Association of Active Investment Managers (NAAIM) Exposure Index sank to 30.3% exposure to equities this week, the lowest number since hitting 28.7% in April 2020. These numbers are considered contrarian indicators and are at levels last seen when the Covid-19 pandemic hit global markets pointing to a market that could be in the process of bottoming.
This week investors cheered Fed Chair Powell’s testimony on monetary policy that the Federal Reserve planned to raise interest rates 0.25-point at the March FOMC Meeting to counter soaring inflation. The Federal Reserve is in a complex situation however, where it faces a need to rein in runaway inflation while in turn, possibly looking at slowing growth as the Ukraine conflict rages on. Analysts are already trimming earnings estimates in the back half of 2022 which is another headwind for the Fed. Unfortunately, it looks like the spike in commodities will continue as global economies weather sanctions on Russia, and the Fed’s quarter-point hike to curb inflation is unlikely to make a dent in rising prices. That could lead to a more aggressive tightening in policy despite the Feds attempt to navigate a soft landing for the economy. While the Fed ‘walks a tightrope’, a flattening of the yield curve suggests that if Powell and Committee members misstep, they could end up trying to prevent a recession.
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, unchanged from the previous week. Cycles D and E are bullish, while Cycles A, B and C are bearish. It’s possible the low in the DJIA from the week ending 3/25/22 represented a bottom that would lead to a reset of cycles A, B and C and a positive configuration for the CTI. However, because of a lack of positive divergence and the ongoing conflict, a more cautious approach will be issued and the CTI reset will be extended out for another week.
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, up two notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 1141 units while the number of new 52-week lows exceeded the number of new highs on four sessions. Breadth was also negative at the NASDAQ as the A/D line fell 3804 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 increased to 36.3% vs. 27.9% the previous week, while those above their 200-day moving average rose to 36.3% vs. 28.5%. 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 +7, up three notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 3/02/22 shows inflows of $1.8 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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