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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Summer Rally Rolls Into August On Strong Earnings
A volatile week ended higher as the major averages absorbed better-than-expected earnings, slowing inflation, improving economic data and a 0.25-point rate hike mid-week by the Federal Reserve. Stocks were on the rise to kick off the period as investors hoped that we could see the end of the Fed’s tightening cycle and the DJIA was on its longest daily win streak in more than two-years. Also boosting equities were strong earnings from tech giants Alphabet (GOOGL), NXP Semiconductors (NXPI), Lam Research (LRCX) and Meta Platforms (META). It wasn’t just technology reporting solid earnings. Shares of General Electric (GE), 3M (MMM), Align Technologies (ALGN), Meritage Homes (MTH), First Solar (FSLR) and McDonalds (MCD) rallied after beating estimates and raising forward guidance. A tick above 4% in the yield on the 10-year treasury on Thursday however, tripped up the bulls and sent the different indexes down as a +2.4% GDP print and a +4.7% jump in June Durable Goods Orders triggered fears that the resilient economy could be heating up too much. The selloff reversed course on Friday after core-Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure, came in at +0.2% and +4.1% YoY, its lowest level since 9/21. The major averages closed the week on a high note led by Intel (INTC) and KLA Corp (KLAC) after beating earnings estimates and raising guidance. Yields ticked higher during the week but eased on Friday leaving the rate on the 10-year Treasury at 3.96% and the two-year T-Bill at 4.87%. Crude oil prices were higher for a fourth consecutive week, crossing $80 a barrel, closing at $80.47. The sectors were mixed with Communication Services (XLC) jumping +4.96% on gains in Alphabet (GOOGL) and Meta Platforms (META) which hit new 52-week highs, followed by strength in Energy (XLE), Materials (XLB), Consumer Discretionary (XLY) and Technology (XLK). Rate sensitive sectors were the weakest market groups with Utilities (XLU) and REITs (XLRE) the worst performers, and Healthcare (XLV) another laggard. With Friday’s bounce the DJIA and S&P 500 finished higher for a third-straight week, while the NASDAQ put together its second winning week out of the last three. For the period, the DJIA added 231.60 points (+0.7%) and settled at 35459.29. The S&P 500 picked up 45.89 points (+1.0%) and closed at 4582.23. The NASDAQ jumped 283.85 points (+2.0%) finishing at 14316.66, while the small cap Russell 2000 gained 21.28 points (+1.1%) finishing at 1981.54.
Market Outlook: The technical condition of the market remained bullish this week on volatile trading that saw the S&P 500 close at a 16-month high. The technical indicators for the major averages are mostly in bullish territory with Momentum, as measured by the 14-day RSI, strong, but the DJIA and S&P 500 ended the period overbought by several measures including stochastics in the 90’s. Thursday’s selloff saw MACD, a short-term trend gauge, cross into bearish territory for the S&P 500 and NASDAQ as the indexes consolidated recent gains. The secondary indexes continue to show relative strength with the DJ Transportation Index and Philadelphia Semiconductor Index both flirting with new all-time highs which bode well for the market going forward. The DJ Transportation Index increased +2.9%, while the Philadelphia Semiconductor Index jumped +4.1%. The small cap Russell 2000 hit its highest level since February of this year but needs to cross above 2000 to abort a bearish double-top chart pattern. Traders will be keeping an eye on that next week and a break above that level would signal that the market rally is continuing to broaden out as we home in on new highs. Finally, almost half of the 11 sectors are at new 52-week high, including Communication Services (XLC), Consumer Discretionary (XLY), Industrials (XLI) Technology (XLK) and Materials (XLB) also showing expansion in the rally. As mentioned last week, the upside target for the DJIA is 36300-36800, and 4640-4650 for the S&P 500. The NASDAQ target of 14400-14500 was reached and further upside could be limited for the tech heavy index.
Underlying breadth was positive and supportive of higher prices as the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, continue to show the majority of stocks are under accumulation with the NYSE A/D line at its highest accumulative level since January 2022. New 52-week highs outpaced the new lows on the NYSE and NASDAQ but contracted after reaching multi-week highs. Investor Sentiment is close to reaching extreme bullish levels which is a concern, but the American Association of Individual Investors (AAII) saw some bullish retail investors moving to the neutral camp after we saw the most retail bulls since November 2021 the previous week. The National Association of Active Investment Managers (NAAIM) Exposure Index increased for a fourth consecutive week rising to 101.8%. The last time this group was this exposed to equities was November 2021 when the NASDAQ topped out. As mentioned last week, these surveys are considered contrarian indicators when they reach extreme levels as it means that everyone is on one side of the trade. 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 +3, 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 into August.
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 +8, down two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 1240 units while the number of new 52-week highs exceeded the number of new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line added 679 units while the number of new highs out did the new lows on four of five days. Finally, the percentage of stocks above their 50-day moving average fell to 73.5% vs. 78.6% the previous week, while those above their 200-day moving average eased to 63.2% vs. 65.2%. 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 Negative at -5, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 7/26/23 shows inflows of $3.2 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 7/21/2023 (DJIA – 35227.69).
Ask Mr. Seifert
My advisor says to buy debit spreads since they have less risk than a credit spread. Is he right?
Your broker is referring to the fact that a debit spread will always have less premium risk than a credit spread. However, that doesn’t mean that it has less risk. In fact, it has more risk than a credit spread with the same strike. Here is why. For the debit spread to be profitable it must overcome the premium you paid plus it must move in the price direction that you predicted when you bought it. Even if you are correct in predicting the price movement, it may not move enough to overcome the debit. In short, you have to be right and right. On the other hand, a credit spread can win three ways. The price moves in the direction you predicted, the price doesn’t move at all, or the price moves against you but not as much as the credit you sold. For my money, I would rather have three ways to win and take the larger premium risk. In the long run you can’t beat a credit spread.
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