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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Nvidia Earnings Recharge NASDAQ
The S&P 500 and NASDAQ were able to bring an end to their three-week losing streak after blowout earnings from Nvidia (NVDA) helped trigger a bounce in big cap technology shares. Investors hoped Nvidia earnings would spark a reversal in equities, but they also were looking for comments from Fed Chair Jerome Powell on Friday to possibly signal the Federal Reserve was at the end of its tightening cycle. Mixed earnings from several retail companies including Lowes (LOW), Macy’s (M) and Dick’s Sporting Goods (DKS) and a downgrade of bank credit from S&P Ratings led to a bumpy road during the week but the NASDAQ was riding a three-day win streak ahead of Nvidia’s earnings. Despite coming in ahead of bullish expectations, Nvidia’s report turned out to be a sell the news event and the different indexes traded sharply lower on Thursday in a broad-based selloff. Powell’s ‘no surprises’ speech on Friday reiterated that the Fed would hold rates higher for longer, but he also cautioned that the Fed did not want to do too much and throw the US economy into a recession. Investors gave a thumbs up and stocks rallied into the weekend. While long-term yields were little-changed on the week, the two-year T-Bill nudged above 5% and closed at 5.07%. The rate on the 10-year Treasury finished the period at 4.23% after touching 4.357% earlier in the week. Crude oil prices eased on weak manufacturing data out of China and Europe but regained $80 a barrel to finish at $80.02 on Friday. The market sectors were mixed, led by a +2.27% spike in Technology (XLK) followed by strength in Consumer Discretionary (XLY) and REITs (XLRE). Energy (XLE) and Consumer Staples (XLP) were the worst performing sectors. The S&P 500 and NASDAQ snapped their three-week losing streak, but the DJIA was unable to keep pace as it dropped for a second straight week.
For the period, the DJIA lost 153.76 points (-0.4%) and settled at 34346.90. The S&P 500 picked up 36.00 points (+0.8%) and closed at 4405.71. The NASDAQ jumped 299.07 points (+2.3%) finishing at 13590.65, while the small cap Russell 2000 eased 5.79 points (-0.3%) finishing at 1853.63.
Market Outlook: The technical condition of the market remained weak as the different indexes closed the period below key MA resistance levels. The technical indicators are in negative territory with MACD, a short-term trend gauge, bearish across the board and Momentum, as measured by the 14-day RSI, in negative ground but showed some improvement in the S&P 500 and NASDAQ. The DJIA, DJ Transportation Index and small cap Russell 2000 are oversold with stochastics below 15. The Market Edge/S&P Short Range Oscillator (SRO) closed the week at -5.25% which could induce some buying to start the week. The major averages are stuck trading between their respective 50 and 100-day MA’s currently and on Thursday, the NASDAQ, DJ Transportation Index and Philadelphia Semiconductor Index all slammed into resistance at their 50-day MA before being turned back. Countering that, was a successful test of support at their respective 100-day MA by the DJIA, Russell 2000 and DJ Transportation Index during the week. As mentioned last week, the DJIA could find support at 34040-34120 and the blue-chip index hit 34029 during the week. Support for the S&P 500 should fall in the 4300-4320 area after reaching 4340.
Underlying breadth remains weak and is not supportive of a market rebound. The NYSE and NASDAQ Advance/Decline lines have lost ground for three consecutive weeks showing the majority of stocks are under distribution. In addition, new 52-week lows outpaced the new highs on both the NYSE and NASDAQ. Finally, investor sentiment is neutral with both retail and the pros seeing a drop-off in bullishness. According to the American Association of Individual Investors (AAII), retail bulls fell for a third week to 32.3%, the least number of bulls since the first week of June and remain below their historical average of 37.5%. The pros continue to lighten up on equities with the National Association of Active Investment Managers (NAAIM) Exposure Index down to 34.4, which is the lowest exposure to stocks since October 2022.
The Market Edge CTI (Cyclical Trend Index) is in a Bearish configuration that looks to extend through September and the Market Posture is Bearish indicating a higher risk of more downside for the major averages. With that in mind, ‘good news’ could once again be viewed as ‘bad news’ for stocks and could lead to more selling. Without a catalyst to move the equity market higher, depending on your risk tolerance, it might be a good time to add to your cash position as we turn our eyes to September, which looks like it could add to its history as the weakest month of the year for stocks.
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 -4, down a notch from the previous week. Cycles A, C and D are bullish, while Cycles B and E are bearish. The CTI is projected to remain in a negative connotation through September.
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 -10, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 365 units while the number of new 52-week lows exceeded the number of new highs on all five sessions. Breadth was also negative at the NASDAQ as the A/D line dropped 965 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 29.7% vs. 32.8% the previous week, while those above their 200-day moving average eased to 45.4% vs. 45.7%. 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 +0, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 8/23/23 shows outflows of $11.2 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bearish as of the week ending 8/18/2023 (DJIA – 34500.66).
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The second principal that a trader must learn after they understand that the market is an auction is that there is no silver bullet that prints money. Trading is a probability game and as such, wild things are going to happen. Let’s say that you follow Market Edge, which has had a phenomenally accurate prediction record for the past 25 years. Even if it picks 70% winners, you are still going to have losing periods where nothing goes right. If you quit trading every time that it hits a slump, you will be around for the losers but will miss out on the winners. When you trade or invest you must be willing to accept the inevitable drawdowns that are part of the business. Even Warren Buffett takes beatings from time to time and if he quit every time things went sour, you wouldn’t know his name!
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