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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Recession Fears Fuel Selloff
The major averages surged higher to start the week as investors hoped cooler inflation and slowing economic data would force the Federal Reserve’s hand and back off its aggressive tightening policy. Fed Chair Powell dashed investors’ hopes in his Wednesday FOMC press conference however, after raising rates 0.50-point and lifting the Fed funds rate to 5.1%. Equities tumbled into the weekend as market participants were afraid the Fed was on track to over do it and send the economy into a recession. Leading up to the FOMC Meeting the DJIA soared more than 1200-points as the November CPI came in below expectations, but traders faded the rally on Tuesday afternoon, cautiously waiting for the Feds announcement on policy. The more hawkish rhetoric on Wednesday from Fed officials erased another jump in prices and sent stocks sharply lower before finishing the day with marginal losses. Weak manufacturing data and a big drop in Retail Sales on Thursday once again fueled recession fears and the different indexes sold off hard, turning in their biggest losses since September. Investors stayed on the sidelines on Friday and the different indexes closed near the lows for the week. The selloff was seen in every sector with weakness across the board. While Energy (XLE) outperformed on higher crude oil prices and nudged out a modest gain, the weakest sectors were Consumer Discretionary (XLY), Communication Services (XLC), Technology (XLK), Financial (XLF) and Materials (XLB). Yields finished the week lower as investors were risk off and bought bonds. The rate on the 10-year T-Bill landed at 3.49% with the two-year closing at 4.21%. The major averages limped into the weekend on their first two-week losing streak since September and the S&P 500 and NASDAQ erased their November gains.
For the period, the DJIA lost 556.00 points (-1.7%) and settled at 32920.46. The S&P 500 fell 82.02 points (-2.1%) and closed at 3852.36. The NASDAQ dropped 299.21 points (-2.7%) finishing at 10705.41, while the small cap Russell 2000 gave up 33.24 points (-1.9%) finishing at 1763.42.
Market Outlook: The technical condition of the market deteriorated this week as the major averages broke below key secondary support levels and finished the period down for a second-straight week. The technical indicators for the different indexes continue to decline with MACD, a short-term trend gauge, bearish and Momentum, as measured by the 14-day RSI, sliding into negative ground. While the DJIA remains above its 200-day MA, it fell back below its descending trend line off the January-October highs and the blue-chip index slipped back below its August high. The S&P 500 is now trading below its 200, 100 and 50-day MA. After sinking below secondary support at 3930 during the week the bellwether index hit our initial downside target of 3840 on Friday. The NASDAQ dropped below its 50-day MA but remains in a range between 10200 and 11400 that has been in place since September. Negative divergence is seen in the secondary indexes which have underperformed the major averages, with the DJ Transportation Index ending the week sitting on its 50-day MA, while the Russell 2000 dropped below its 50-day MA. Market technicians look to the secondary indexes to lead the market higher and lower. The Philadelphia Semiconductor Index, which had been stuck in a narrow range, finished the period at the bottom of that range and a break below 2630 would suggest more selling. Underlying breadth deteriorated with the NYSE and NASDAQ Advance/Decline lines moving lower showing the majority of stocks are under distribution. New 52-week lows outdid the new highs on both exchanges and expanded during the period. Investor sentiment remains mixed. While the percentage of bullish retail investors, according to the American Association of Individual Investors (AAII), ticked lower, Investor’s Intelligence (II) Percentage of Bullish Investment Advisors shows the bulls outnumbering the bears for a fourth consecutive week. Finally, Refinitiv Lipper US Fund Flows reported negative Equity Fund Outflows for a fourth straight week. December usually will see positive fund flow into equities due to an influx of money coming in from end of year bonuses and retirement plan contributions and this reinforces that investors remain bearish on equities.
Next week begins the official start to the Santa rally and with stocks so oversold we are likely to see the different indexes stage a bit of a bounce. The Market Edge/S&P Short Range Oscillator (SRO) closed the week at -4.78%, which historically has triggered some buying. Investors fear Santa could be a no show, but if St. Nick can rally the bulls for a few days, market conditions look for ripe for more weakness in the New Year.
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 +6, down two notches from the previous week. Cycles B, C and D are bullish, while Cycles A and E are bearish. The CTI is projected to remain in a positive configuration through 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 -5, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 1436 units while the number of new 52-week lows exceeded the number of new high on all five sessions. Breadth was also negative at the NASDAQ as the A/D line dropped 2434 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 fell to 38.0% vs. 66.7% the previous week, while those above their 200-day moving average increased to 56.0% vs. 43.7%. 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 Neutral at +2, down a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 12/14/22 shows outflows of $6 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 10/21/2022 (DJIA ñ 31082.6).
Ask Mr. Seifert
Question: Why is it when I buy options on earnings reports and I am right as to the price direction I still lose money?
Answer: That is because the other side of the trade that sold you your options has priced in movement that would not normally be published. If you are trading ABC stock and it has a normal range of +/- 4.00 a week, it is not uncommon for the stock to have its range increased by 50% to 100% just before earnings are released. Over my thirty years of trading options, I have seen hundreds of times when the earnings release is as published, and the stock barely budges. When that happens, all of the options go down in value. It doesn’t matter which ones you own. My advice is that if you want to trade earnings never buy naked options, especially the expiring straddle or strangle. If you want to play this game, you should spread the premium. Either sell vertical or horizontal spreads. You might not hit a home run, but you will hit a lot of singles and doubles and will have very few strike outs.
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