CNBC has revised their Option Action show which is aired every weekday night at 5:30. They have really beefed up the Friday show to the point that we think it is one of the best option oriented shows on the air. Check it out.
Bulls Run Out of Gas
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The bulls and bears were in a tug-of-war this week before the bears were able to wrestle control and pull equities back into the red on Friday. Stocks struggled after the long holiday weekend as crude oil prices soared to $119.80 on Tuesday as Europe took additional steps to wean itself on Russian imports. Chevron (CVX) was the only Dow component to close the session positive. Also weighing on the market was an uptick in rates after Fed Governor Christopher Waller said he supported hiking rates beyond the neutral point to beat inflation and projected several more 0.50-point increases ahead. The yield on the 10-year Treasury eyed 3% before settling the week at 2.945%. The major averages jumped at the open on Wednesday after OPEC agreed to increase production, but the rally failed to stick after JP Morgan Chase (JPM) CEO Jamie Dimon warned investors to “brace yourself for an economic hurricane” on the Fed’s late reaction to inflation. The DJIA dropped another 300-points at the open on Thursday before the bulls took control and sent the blue-chip index up 435-points on signs that China was close to reopening, with the government providing more stimulus to boost economic growth. The different indexes surged in a broad-based rally with every sector except Energy (XLE) green, leaving the DJIA, S&P 500 and NASDAQ back in the plus column for the week. A stronger than expected jobs report on Friday took the wind out of the sails on concerns that the number would keep Fed officials on the offense on rates and the major averages tumbled into the weekend with big cap technology seeing heavy selling. Friday’s selloff pulled the major averages back in the red for the week.
For the period, the DJIA slipped 313.26 points (-0.9%) and settled at 32899.70. The S&P 500 fell 49.70 points (-1.2%) and closed at 4108.54. The NASDAQ dropped 118.40 points (-1.0%) finishing at 12012.73. The small cap Russell 2000 gave up 4.85 points (-0.3%), finishing at 1883.05.
Market Outlook: The technical condition of the market was little changed this week as the major averages were unable to build on the previous week’s gains. The technical indicators were mixed with MACD, a short-term trend gauge, in bullish ground, but Momentum, as measured by the 14-day RSI, slid back into neutral ground. The rally in the DJIA and S&P 500 off the May lows, stalled this week after retracing close to 38.2% of the January-May selloff, which is a negative for investors looking for signs of a summer rally. The NASDAQ and small cap Russell 2000 have yet to retrace that level, which represents the first test of resistance for the major averages. While we saw positive signs of market momentum last week, the lack of follow through this week raises a red flag and until the major averages are able to close above those resistance areas and investors need to remain cautious. There was however, positive divergence by the DJ Transportation Index and small cap Russell 2000 which outperformed the mjaor averages. Underlying breadth deteriorated with the NYSE and NASDAQ Advance/Decline lines both losing ground this week, while the NYSE registered two-days of more new 52-week highs than lows for only the second time since early April. Investor sentiment remains bearish but the previous week’s bounce helped lighten investors sour outlook. We saw a nice uptick in retail bulls as the American Association of Individual Investors (AAII) bulls jumped to 32.0 from 19.8 previously, while the bears fell from 53.5 to 37.1. That’s the lowest number of bears since the last week of March. There was also a pick-up in the Percentage of Bullish Investment Advisors climbing to 35.2% from 28.2%. The professionals weren’t swayed by the rally as the National Association of Active Investment Managers (NAAIM) Exposure Index only increased to 34.3% this week, up from 33.2%.
Friday’s jobs report kept the major averages from rising for a second week, but losses were held in check. The better than expected report sent rates higher and the Federal Reserve will need to see payrolls start to contract to put downward pressure on inflation and slow rate hikes. Beyond that, Central Banks need to reduce liquidity by $3 trillion which will remain a drag on growth over the next 18-months. Currently, the market has priced in a 0.50-point hike in June and July, and with Friday’s jobs report the CME Group FedWatch now projects another 0.50-point hike in September at 61.7%, up from just 35% last week. While all that certainly is enough to trip up the Fed’s hopes for a soft landing, if economic data and the labor market soften from here, a summer rally in stocks could still be in the cards despite 2022 being the one of the worst starts to the year for the S&P 500 since 1932. This week, LPL Research and FactSet reported that the years with the five worst starts after 100 days actually finished the year positive. The median return was +15% and outperformed the S&P 500’s average yearly return of +5%. Like Elon Musk, you may have a bad feeling about things, but if history repeats itself, a summer rally could still be in the cards.
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 +12, unchanged from the previous week. Cycles A, B, C, D and E are bullish. The CTI is expected to remain positive until August.
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 Positive at +6, unchanged from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 1379 units while the number of new 52-week highs exceeded the number of new lows on three sessions. Breadth was negative at the NASDAQ as the A/D line fell 1374 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 45.4% vs. 32.4% the previous week, while those above their 200-day moving average increased to 30.2% vs. 25.9%. 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, down a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 6/01/22 shows inflows of $7.4 billion. That marks positive inflows for a second straight week after seven weeks of outflows.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 5/27/2022 (DJIA – 33212.96).
Ask Mr. Seifert
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