The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Major Averages Struggle As Inflation Rears Its Head
The economy countered hotter inflation with stronger than expected economic data this week that kept hopes for a soft landing alive before the major averages succumbed to a bump higher in yields as the period ended. Back and forth trading saw gains in big cap technology stocks on Monday, led by Tesla (TSLA) and Meta Platforms (META), nearly erased on Tuesday after Oracle (ORCL) missed earnings pulling tech stocks down in sympathy. Sticky inflation numbers midweek in the CPI and PPI however, due mainly to higher fuel prices, supported the case for yields to remain higher for longer and opened the door for an additional rate hike later in the year whipping stocks higher and lower. The Bulls were back in control on Thursday after better than expected August Retail Sales numbers showed consumers were still spending and the DJIA rung the bell on its best one-day point gain since early August. Stronger manufacturing data on Friday saw yields tick higher again, putting more pressure on stocks as the different indexes closed the week on a sour note. While investors are counting on the Fed leaving rates unchanged at next week’s FOMC Meeting, the rate on the 10-year Treasury increased to an important resistance level of 4.35% before pulling back to 4.336% and the two-year T-Bill landing at 5.037%. Crude oil prices extended gains for a third consecutive week crossing above $90 a barrel for the first time since November as OPEC+ extended production cuts, finishing at $91.10.
For the period, the DJIA added 41.65 points (+0.1%) and settled at 34618.24. The S&P 500 eased 7.17 points (-0.2%) and closed at 4450.32. The NASDAQ lost 53.20 points (-0.4%) finishing at 13708.33, while the small cap Russell 2000 gave up 4.51 points (-0.2%) finishing at 1847.03.
Market Outlook: The technical condition of the market deteriorated this week as the major averages struggled and failed at key MA resistance. The technical indicators dipped into neutral to negative ground with Momentum, as measured by the 14-day RSI, slowing. Although the major averages crossed above resistance at their respective 50-day MA on Thursday, they were unable to hold the line and closed the period back below that key support/resistance level which hints at lower prices ahead if unable to move back across that level as the week begins. The 100-day MA would serve as next support. The secondary indexes, which include the DJ Transportation Index, small cap Russell 2000 and Philadelphia Semiconductor Index, saw their technical indicators drift into negative ground with the small caps and semi’s closing below their 100-day MA, but remained above their 200-day MA. A break below that key support level could trigger more selling in stocks.
Underlying breadth was weak as the NYSE Advance/Decline line was flat, while the NASDAQ Advance/Decline line lost ground showing most stocks were under distribution. Neither A/D lines have made much progress since early June, having peaked in mid-July showing a lack of commitment from buyers. Market technicians look at the A/D line as a leading indicator of market direction and points to the different indexes perhaps staying range bound to lower over the next few weeks. The number of new lows outnumbered the new highs on each day on the NASDAQ and on all but one day on the NYSE showing a lack of leadership. Investor sentiment remains neutral and again we’re seeing a divergence in retail and the pros. According to the American Association of Individual Investors (AAII), we saw a drop in retail bulls to 34.4%, down from 42.2% the prior week, while the National Association of Active Investment Managers (NAAIM) Exposure Index jumped to 58.0 from 49.7. That compares to an average exposure of 70.2 last quarter.
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 -6, unchanged 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 -8, down two notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line added 211 units while the number of new 52-week lows exceeded the number of new highs on four sessions. Breadth was negative at the NASDAQ as the A/D line dropped 1090 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 36.7% vs. 30.6% the previous week, while those above their 200-day moving average rose to 48.6% vs. 45.8%. 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 -1, down two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 9/13/23 shows inflows of $10.5 billion. That’s the first fund inflow in seven weeks.
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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