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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Bulls Charge Into April
Equities turned sharply higher this week as investors shook off banking concerns, and economic data showed progress in the war on inflation. News that North Carolina based bank First Citizens (FCNCA) was buying Silicon Valley Bank (SIVB) over the weekend helped boost financial shares to start the week, but the major averages were mixed on profit taking in technology stocks after their recent runup. Solid earnings and guidance midweek coupled with comments from Fed officials that rate hikes were almost off the table rallied equities again and the NASDAQ touched a six-week high on Thursday. Friday’s lower than expected Personal Consumption Expenditures Index (PCE), the Fed’s preferred inflation gauge, kicked the different indexes higher once again ahead of the weekend and the major averages closed out the week and the first quarter of 2023 on a high note. The gains were across the board with every sector finishing green led by strength in Energy (XLE), Consumer Discretionary (XLY), REITs (XLRE) and Materials (XLB), up more than +5%. Yields firmed as worries over the banking system abated but closed near the lows of the year on dovish Fed comments on Friday with the 10-year Treasury closing the week at 3.48% and the two-year T-Bill landing at 4.04% after dipping to 3.77% the previous week. The banking woes did help gold prices however, with gold futures flirting with $2000 an ounce before ending the week at $1987.80 an ounce. Gold last traded above the $2000 mark in August 2020. Crude oil prices increased about +8% during the period. The bulls were back in control as the week ended with the DJIA closing higher for a second straight week, while the S&P 500 and NASDAQ gained for the fourth week out of the last five.
For the period, the DJIA picked up 1036.62 points (+3.2%) and settled at 33274.15. The S&P 500 added 138.32 points (+3.5%) and closed at 4109.31. The NASDAQ jumped 397.95 points (+3.4%) finishing at 12221.91, while the small cap Russell 2000 outperformed gaining 67.56 points (+3.9%) finishing at 1802.48.
Market Outlook: The technical condition of the market improved this week with the major averages extending their gains and trading above key moving average (MA) resistance. The technical indicators for the DJIA, S&P 500 and NASDAQ are in positive ground with MACD, a short-term trend gauge, having crossed to a bullish trend, while Momentum, as measured by the 14-day RSI, is strong and increasing. The secondary indexes, which market technicians would like to see leading the market higher and lower, showed positive divergence and outperformed the major averages. While the small cap Russell 2000 remains below key MA resistance due to the selloff in regional bank shares that are in the index, the DJ Transportation Index traded back above its 100 and 200-day MA. The Philadelphia Semiconductor Index continues to show Relative Strength and closed the period at a 52-week high which is a plus for the market going forward. Sectors wise, we saw Technology (XLK) take out its February high with Communication Services (XLC) a chip shot away from its February high, while Consumer Discretionary (XLY), Consumer Staples (XLP) and Industrials (XLI) took out a key MA resistance level at their respective 50-day MA. Energy (XLE) and Materials (XLB) traded above their 200-day MA. Financials (XLF), Energy (XLE), REITs (XLRE) and Healthcare (XLV) continue to underperform the S&P 500. With the stock market now in a seasonally strong period, further upside looks to be in the cards. New upside targets for the major averages are 34,000-34.200 for the DJIA and 4180-4200 for the S&P 500. The NASDAQ target is now 12600-12620.
Underlying breadth was bullish with the NYSE and NASDAQ Advance/Decline lines, which are leading indicators of market direction, moving sharply higher showing the majority of stocks are under accumulation. New 52-weeks highs outnumbered the new lows on the NYSE with the lows contracting throughout, while the NASDAQ saw a big reduction in the number of new lows contracting to 110 on Friday, down from 623 just over two-weeks ago. Despite the banking turmoil, Investor Sentiment improved and is now neutral. According to the American Association of Individual Investors (AAII) however, retail investors are still bearish by about a 2:1 ratio, but there was a small uptick in the percent of bulls. The professionals are still neutral on the market but showing increased bullishness. The National Association of Active Investment Managers (NAAIM) Exposure Index jumped to 65.1%, up from 41.9% two weeks ago, while the Percentage of Bullish Investment Advisors firmed to a neutral 40.8%.
After the banking turmoil and softer inflation data that we’ve seen in the last few weeks, it feels like we’re in the ninth inning of the Fed’s tightening game. Friday’s PCE Index report, the Federal Reserve’s favored inflation indicator, was below expectations at +0.3% and down from +0.6% in January. That may not prevent Powell and Associates from raising rates another 0.25-point at the May FOMC Meeting, but as of Friday the CME Group FedWatch has it a coin-toss between a pause or hike. This week some analysts were calling for rate cuts later in the year that could propel equities higher, while across the table, the other side was calling this a relief rally. I’m not sure I agree with either side. Its doubtful inflation will curb itself enough this year to warrant rate cuts. On the other hand, the US economy has proven itself to be stronger than expected and could be supportive of higher prices over the near term. Either way, as we enter a seasonally strong period for the market, equities should be able to climb a wall of worry’ into May. After that? I’d continue to keep an eye on the yield curve. Despite a resilient economy, history shows that it’s the pace of rising yields that throws the economy into a recession and we’re just emerging from one of the fastest and steepest tightening periods on record. The Bulls are in control for now, but investors may want to lighten up on the run in May. If economic data begins to bog down, we could be in for another long, hot summer where stocks struggle against the weight of the Fed’s year long battle to tame inflation and renewed worries of 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 +8, unchanged from the previous week. Cycles A, B, C and D are bullish, while Cycle E is bearish. The CTI is projected to stay positive into May.
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 +10, up eight notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 6964 units while the number of new 52-week highs exceeded the number of new lows on three sessions. Breadth was mixed at the NASDAQ as the A/D line added 4081 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 34.3% vs. 22.5% the previous week, while those above their 200-day moving average rose to 49.6% vs. 39.4%. 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 3/29/23 shows outflows of $20.5 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 3/24/2023 (DJIA – 32237.53).
Ask Mr. Seifert
Is it possible to sell a credit spread that has less risk than reward?
Yes, it is possible to sell a credit spread that has less risk than reward. The trade is called a 60/40. It is an aggressive directional spread. Here is how it works. Normally when we sell a credit spread, we sell the ATM strike and buy a strike that is further out of the money. If you use a 60/40, we would sell a spread that is slightly in the money. We are not taking a neutral position. We are trying to predict the direction that stock will move. So instead of selling a 5.0 wide spread for $220 and assuming a $280 risk we would sell the spread for $280 and assume a $220 risk. We never risk more than the difference between the strikes minus the premium we collect from the spread. The difference is in the 60/40 spread, if the price doesn’t move in our favor, we will not collect the entire $280. We will collect a portion of the spread as a profit. The 60/40 is a spread that many professional traders use when they are confident that the price will move in their favor.
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