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.
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Stocks Rally Ahead of Fed Meeting
While the NASDAQ struggled mid-week on weakness in big cap tech shares after disappointing Q3 earnings, the broader market rallied on hopes that weaker economic data would slow the Federal Reserve’s aggressive tightening policy by year end. The major averages opened the week on a high note as weaker manufacturing data tugged on rates and investors looked forward to earnings from technology heavyweights Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META) and Apple (AAPL). Traders were disappointed in the big cap results however, sending the NASDAQ on a two-day dive, but better-than-expected numbers from Coca-Cola (KO), Visa (V), Harley-Davidson (HOG), Caterpillar (CAT) and others throughout the period sent the DJIA and small cap Russell 2000 on a six-day win streak. Helping to boost equities was the yield on the 10-year Treasury briefly falling below 4% as Housing and Durable Goods Orders showed the Fed’s tightening was influencing inflation. Thursday’s third-quarter advance GDP number of +2.6% reversed two quarters of negative growth stirring hopes that the Fed could navigate a soft landing for the US economy. The market gains were led by value and rate sensitive sectors with Industrial (XLI), Utilities (XLU), Financials (XLF), REITs (XLRE) and Consumer Staples (XLP) all up more than +6%. The Communication Services (XLC) sector was the lone red mark on the chart weighed down by weakness in Alphabet, Meta and Snap. Crude oil prices were higher on a bigger than expected drawdown in inventories and the December contract closed the week at $88.18 a barrel, while a weaker US Dollar also helped boost equities. The NASDAQ was able to play some catch-up ball on Friday on strength in Apple (AAPL) and Intel (INTC) after earnings, and the tech heavy index joined the S&P 500 trading higher for a second straight week. The DJIA was on pace for its best month since January 1987, finishing higher for a fourth consecutive week.
For the period, the DJIA jumped 1779.24 points (+5.7%) and settled at 32861.80. The S&P 500 added 148.31 points (+4.0%) and closed at 3901.06. The NASDAQ gained 242.73 points (+2.2%) finishing at 13574.98. The small cap Russell 2000 picked up 104.68 points (+6.0%), finishing at 1846.92.
Market Outlook: The technical condition of the market improved last week as the major averages continued to work their way higher after hitting new lows just two weeks ago. The technical indicators are planted firmly in positive ground but in some cases are approaching an overbought condition. MACD, a short-term trend gauge, is bullish for the different indexes, while Momentum, as measured by the 14-day RSI, is positive. The rally in the DJIA sent the blue-chip index back above its 200-day MA for the first time since a brief overlap in August, while the S&P 500 was able to cross above its 50-day MA before pausing at 3900. That level is marked by the 100-day MA and represents the 50% Retracement of the August-October selloff. A move above the 3900 area could trigger another leg higher for the market. The NASDAQ, which underperformed on the period, is trading below both its 50 and 100-day MA. The Russell 2000 and DJ transportation Index were able to cross above their respective 50 and 100-day MA resistance. Positive divergence was seen in the secondary indexes which is a plus for the market going forward. The DJ Transportation Index, small cap Russell 2000 and Philadelphia Semiconductor Index all outperformed the major averages. Strength was also seen in the iShares NASDAQ Biotechnology ETF (IBB) which jumped +7.3% on the week and traded above its 200-day MA. After this week’s rally the Energy (XLE), Industrials (XLI), Consumer Staples (XLP) and Healthcare (XLV) are now back above their 200-day MA which bodes well for the market. Underlying internal breadth also improved as the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, both showed substantial accumulation, while the number of new 52-week highs expanded during the period. Finally, investor sentiment saw an uptick in bullishness. The American Association of Individual Investors (AAII) survey had retail bulls increasing to 26.6%, which is the first time the bulls and bears have been just about even for the first time since March. Retail investors are mostly on the sidelines however, with 45.7% of participants neutral on the market. That’s the highest percentage of neutral investors since April 2019. The hedge funds are also getting more bullish. The National Association of Active Investment Managers (NAAIM) Exposure Index now shows the professionals have increased equity exposure to 53.9%, up from 43.3% and 19.8% two weeks ago.
Investors are taking on more risk as a slow down in the Fed’s tightening progression by year end seems to be in play. Although we’ve not seen signs that inflation is abating, the consensus is that current weakness in manufacturing and job growth will be a harbinger of lower prices. The November FOMC Meeting gets underway next Tuesday, and market participants have all but inked in a 0.75-point hike in rates. However, the CME Group FedWatch, which had projected the probability of that as high as 98% last week, has trimmed that estimate back to 83.7%. Another sign that the Federal Reserve needs to take its foot off the pedal occurred this week when the yield on the 3-month Treasury inverted with the 10-year note’s rate. This is the Fed’s official barometer of recession risk and last occurred in 2020, 2019, 2007 and 2000. We’ve seen that higher rates will slow economic growth enough to curb inflation, but this week’s yield inversion should be more than just a cautionary sign that the Fed needs to pause sooner than later. Chairman Powell and the Committee should let the effects of previous rate increases play out. If the Fed is attempting to navigate a soft landing, raising rates too high, too fast runs the risk of driving the US economy off a cliff and into a deeper 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 +10, down three notches from the previous week. Cycles A, B, C are bullish, while Cycles D and E are bearish. The CTI is projected to remain in a positive configuration into December.
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 a notch from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 5204 units while the number of new 52-week lows exceeded the number of new highs on all five sessions. Breadth was also mixed at the NASDAQ as the A/D line added 4999 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 48.1% vs. 23.1% the previous week, while those above their 200-day moving average increased to 27.4% vs. 18.9%. 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 +3, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 10/26/22 shows inflows of $7.8 billion. That’s a second straight week of positive inflows for the first time since mid-August.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 10/28/2022 (DJIA – 32861.80).
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