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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Major Averages Mixed on Cracks in Jobs Market
Recession fears rattled equities this week sending investors running to defensive sectors as economic data came in weaker than expected, while jobs growth finally showed signs of softening. A surprise cut in oil production by OPEC on Monday sent oil related shares sharply higher but the broader market finished mixed. The Energy (XLE) sector surged +4.55%, led by a +4.16% spike in Chevron (CVX), pushing the Dow Jones higher, while the NASDAQ traded lower. That was followed mid-week by a drop in February Factory Orders and a weaker than expected March ISM Services Index that slid to a three-month low. A big miss in March payrolls in the ADP Employment Report on Wednesday and an increase to 228k in Initial Jobless Claims and an adjustment to 246k from 198k the prior week triggered more concerns of slowing growth and left the different indexes mixed, but little changed ahead of the long weekend. Yields dropped on the data with the rate on the 10-year Treasury dipping to 3.29% and the two-year T-Bill landing at 3.82%, both September 2022 levels. Gold was one benefactor of growing recession fears, climbing above $2000 an ounce for the first time since August 2020, finishing at $2022.50. Defensive sectors saw sponsorship as Healthcare (XLV), Utilities (XLU), Communication Services (XLC), Energy (XLE) and Consumer Staples (XLP) outperformed, while growth and cyclical sectors Industrials (XLI) and Consumer Discretionary (XLY) were the weakest market groups. The holiday shortened week left the major averages mixed with the DJIA extending its weekly win streak to three, while the S&P 500 and NASDAQ saw their three-win streaks come to an end on marginal losses.
For the period, the DJIA picked up 211.14 points (+0.6%) and settled at 33485.29. The S&P 500 eased 4.29 points (-0.1%) and closed at 4105.02. The NASDAQ lost 133.95 points (-1.1%) finishing at 12087.96, while the small cap Russell 2000 dropped 48.02 points (-2.7%) finishing at 1754.46.
Market Outlook: The technical condition of the market was mixed this week with the DJIA, NASDAQ and S&P 500 finishing little changed. The technical indicators for the major averages remain mostly positive, but Momentum, as measured by the 14-day RSI, slowed. The DJIA found support at its 100-day MA during the week and the major averages are trading above their 50, 100 and 200-day MAs. However, the major averages finished the period overbought with the Market Edge/S&P Short Range Oscillator (SRO) ending Friday at +6.24% which could lead to more back and forth trading ahead. Unfortunately, there was negative divergence in the secondary indexes as the DJ Transportation Index, small cap Russell 2000 and Philadelphia Semiconductor Index underperformed the major averages and closed the week lower. The DJ Transports fell below support at its 50 and 100-day MAs before bouncing off its 200-day MA, but fell -3.3%. The Russell 2000, however, remains below all three key MA levels and every bounce stalled just below its 200-day MA. The Philadelphia Semiconductor Index dropped -4.9%. Upside targets for the major averages are 34,000-34,200 for the DJIA and 4,180-4,200 for the S&P 500. The NASDAQ target is now 12,600-12,620.
Underlying breadth was negative with the NYSE and NASDAQ Advance/Decline lines moving lower, while new 52-week lows on the NASDAQ outnumbered the new highs throughout the week and on two of the four days on the NYSE. Investor Sentiment is neutral, but market participants are becoming more bullish. Retail investors saw a big jump in the number of bulls and according to the American Association of Individual Investors (AAII) are now about even with the number of bears. That’s a turnaround from a bearish 2:1 ratio just last week. The professionals are also more bullish with The National Association of Active Investment Managers (NAAIM) Exposure Index expanding to 72.9%, up from 41.9% three weeks ago, while the Percentage of Bullish Investment Advisors jumped to 48.6% from 397% two weeks ago.
It’s unusual for the Fed’s monthly Employment Situation report to come out when the NYSE is closed, but investors need to tune in Friday morning for another market moving jobs number. This week we finally saw cracks in the labor market and this report should lead to a wild start to the week. If the numbers come in hotter than expected, meaning more jobs created, we’re likely to see a parade of Fed officials call for additional rate hikes to tame inflation at the May FOMC Meeting and equities tumble. However, a cooler number will encourage the bulls to announce that the Fed is on pause and we rally. Currently, Wall Street is looking for 230k non-farm payrolls added with the Unemployment Rate staying at 3.6%. Of course, this is Wall Street and there’s always the chance that someone decides it is a goldilocks number and stocks churn sideways. It’s my opinion that this week’s softer jobs reports hint that the bulls will be ready to rumble on Monday.
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 +5, down three notches from the previous week. Cycles A, B and D are bullish, while Cycles C and E are 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 +6, down four notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 1581 units while the number of new 52-week lows exceeded the number of new highs on two sessions. Breadth was also negative at the NASDAQ as the A/D line dropped 2861 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 35.1% vs. 34.3% the previous week, while those above their 200-day moving average eased to 48.3% vs. 49.6%. 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 +1, down a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 4/05/23 shows outflows of $8.5 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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