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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
NASDAQ Weekly Win Streak Hits Four
Equities were stuck in a narrow range to start the week before optimism that Congress would raise the debt ceiling sparked a rally that stalled just before the weekend. The major averages were able to punch through key resistance areas midweek as better than expected manufacturing and jobs data eased fears that higher rates would send the US economy into a recession and investors rotated into growth sectors with Technology (XLK), Communication Services (XLC) and Consumer Discretionary (XLY) leading the advance. Big cap tech names Microsoft (MSFT), Alphabet (GOOGL), Nvidia (NVDA), Broadcom (AVGO) and Apple (AAPL) all hit new 52-week highs on anticipation that Artificial Intelligence (AI) would trigger higher revenue, but closed the week overbought by several measures. Financial (XLF) stocks also outperformed as the banking crisis receded and the S&P regional Banking ETF (KRE) soared +7.80% on the week. Defensive and rate sensitive sectors were the market laggards as Utilities (XLU), REITs (XLRE), Consumer Staples (XLP) and Healthcare (XLV) all finished lower. Crude oil prices inched higher after finding support around $70 a barrel despite signs that China’s reopening had bogged down, but the Energy (XLE) sector looks oversold here and could firm over the short-term. Yields also nudged higher with rates hitting a two-month high on stronger economic data that suggested the Fed may not be finished tightening. The rate on the 10-year Treasury closed the period at 3.698%, while the two-year T-Bill landed at 4.281%. The major averages took a breather ahead of the weekend but the NASDAQ finished higher for a fourth consecutive week, while the DJIA and S&P 500 were able to snap their two-week snag.
For the period, the DJIA gained 126.01 points (+0.4%) and settled at 33426.63. The S&P 500 added 67.90 points (+1.6%) and closed at 4191.98. The NASDAQ jumped 373.16 points (+3.0%) finishing at 12657.90, while the small cap Russell 2000 picked up 32.87 points (-1.9%) finishing at 1773.72.
Market Outlook: The technical condition of the market improved this week as the major averages were able to finish higher with the S&P 500 and NASDAQ hitting their highest levels since August of 2022. The technical indicators for most of the different indexes pushed into bullish ground with MACD, a short-term trend gauge, positive and Momentum, as measured by the 14-day RSI, increasing. However, the indicators for the DJIA are neutral despite the blue-chip index finding support and trading back above key MA resistance. The secondary indexes, consisting of the DJ Transportation Index, the small cap Russell 2000 and Philadelphia Semiconductor Index, also finished with solid gains. While the Philadelphia Semiconductor Index is strong, surging +7.8% for the week and hitting its highest mark since April 2022, the DJ Transportation Index ran out of gas after driving into resistance at its 50 and 200-day MA. In addition, the 50-day MA crossed below the 200-day MA, an ominous warning going forward. The small caps outperformed on the week and crossed above a descending 50-day MA but stalled below its 200-day MA on Friday. Market technicians look for positive or negative divergence from the secondary indexes for confirmation of the trend of the broader market.
Underlying breadth was mixed and did not confirm the increase in prices. The NYSE and NASDAQ Advance/Decline lines were marginally higher, but the NYSE A/D line, a leading indicator of market direction, has been drifting lower for the past two weeks. New 52-week lows continue to outnumber the new highs on the NYSE and NASDAQ pointing to a narrow group of stocks, in this case big cap tech, leading the market higher. The last time the NASDAQ had more new weekly highs than lows was in February. This negative diversion in market breadth is another red flag going forward. Investor sentiment is neutral but still leans toward the bear camp. The American Association of Individual Investors (AAII) survey shows retail bulls fell to their lowest level, 22.9%, since March , while the National Association of Active Investment Managers (NAAIM) decreased equity exposure for a third consecutive week, falling to 59%.
This week the S&P 500 battled to the top of its extended trading range and looked like it was ready to break out above the highs from February. The NASDAQ, led by big cap tech strength, made a run at its high from August 2022 but also came up short. Last minute posturing by Congressional parties on Friday stalled the rally but investors may want to be cautious and take a wait and see attitude towards any breakout. While stocks could jump on a relief rally once the debt ceiling is raised, the move would not be a confirmed breakout and we might see aggressive traders fade the rally. A healthy or confirmed breakout for a stock or index should include increasing volume, a rising A/D line and expanding new highs showing broad based participation and signal that the bulls are in control, on board and ready to trample the bears. None of those conditions are currently in place, with only two sectors, Technology and Communication Services, at new highs. If a debt ceiling increase triggers a new leg up, a breakout very often will retreat to find support at the previous resistance before continuing higher. If that new support level doesn’t hold, it is called a failed breakout, or bull trap, and prices will begin to fall back. If the broader market can catch up to the breakout in technology, it’s still possible for the major averages to take a fresh leg up. However, with headwinds of higher rates for longer, a possible recession and shrinking earnings, stocks are likely to struggle and could take a breather as the summer heats up.
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 Negative at -1, down two notches from the previous week. Cycles A, B and D are bullish, while Cycles C and E are bearish. The CTI is projected to remain in a negative configuration into July.
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 Neutral at -2, down four notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 796 units while the number of new 52-week lows exceeded the number of new highs on three sessions. Breadth was also mixed at the NASDAQ as the A/D line added 1322 units while the number of new lows out did the new highs on three of the five sessions. Finally, the percentage of stocks above their 50-day moving average jumped to 49.4% vs. 42.9% the previous week, while those above their 200-day moving average rose to 45.3% vs. 44.0%. 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 5/17/23 shows outflows of $7 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 5/05/2023 (DJIA – 33674.38).
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