The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).

Stocks Finish Mixed on Improved Inflation Report

A volatile week saw equities battle soaring rates, higher oil prices and a strong US Dollar against a backdrop of better-than-expected economic, jobs and inflation data before finishing the period mixed. The major averages were whipped higher and lower but closed the period with the S&P 500 down for a fourth consecutive week, but the NASDAQ was able to snap its three-week losing streak. A cross above 4.50% in the 10-year Treasury yield early in the week pulled the major averages sharply lower on Tuesday with the DJIA closing below its 200-day moving average (MA) for the first time since March. The different indexes traded mixed after a late bounce on Wednesday as investors picked up some beaten down stocks. A better-than-expected jobs report and final Q2 GDP read of +2.1% sent yields to their highest level since 2007 on Thursday before rates, crude oil and the dollar looked exhausted after their string of gains and nudged lower in the afternoon. Stocks rallied on the retreat and gapped higher on Friday after August core-PCE Index, the Fed’s preferred inflation gauge, increased less than expected at +0.1% and +3.9% YOY, down from +4.3% the prior month. That led to hopes that the Federal Reserve would feel less pressure to hike rates another 0.25-point at the November FOMC Meeting. The CME Group FedWatch now projects an 82.7% probability that rates will remain unchanged at that meeting. Despite the early jump in equities on Friday, the major averages struggled to hold the gains as a looming government shutdown and the UAW expanding its strike weighed on prices.

For the period, the DJIA lost 456.34 points (-1.3%) and settled at 33507.50. The S&P 500 lost 32.01 points (-0.7%) and closed at 4288.05. The NASDAQ tacked on 7.51 points (+0.1%) finishing at 13219.32, while the small cap Russell 2000 picked up 9.50 points (+0.5%) finishing at 1785.10.

Market Outlook: The technical condition of the market remains weak as the major averages finished the period mostly lower. The technical indicators are in bearish ground but the DJIA, S&P 500 and NASDAQ finished the week oversold by several measures. Stochastics are in the teens and the Market Edge/S&P Short Range Oscillator (SRO) finished Friday at -4.97% which historically has brought in buyers. The DJIA couldn’t crack through resistance at its 200-day MA this week which doesn’t bode well for the blue-chip index going forward, while the S&P 500 and NASDAQ are stuck trading between their respective 100 and 200-day MA. There was some positive divergence in the secondary indexes as the small cap Russell 2000 and Philadelphia Semiconductor Index outperformed and finished the week in the plus column. From a technical view, this could indicate that the major averages may be close to putting in a bottom. In addition, MACD, a short-term trend gauge, was close to having a bullish crossover for those indexes as the week ended which also suggests that a trading bottom could be close. Finally, the Market Edge Cyclical Trend Index (CTI), a proprietary market forecasting model, would be set to a bullish configuration next week if the DJIA is able to remain above 33306.30. A trade below that however, would extend the bearish market posture out at least another week. As noted last week, the DJIA recorded a bearish Head & Shoulders (H&S) chart breakout which points to 32750-32800 as a downside target for the blue-chip index. There is also a bearish Head & Shoulders (H&S) chart formation on the S&P 500 that targets 4100-4120, though support can be found at 4200 where the bellwether index’s 200-day MA aligns suggesting a cautious stance as the week begins.

Underlying breadth is weak with the NYSE and NASDAQ Advance/Decline lines again losing ground, but this indicator bottomed on Tuesday and firmed as investors began to buy dips. The NYSE A/D line will often bottom before the major averages and traders should keep an eye on the daily totals. New 52-week lows continue to outnumber the new highs on both exchanges, but these contracted sharply on Friday as the week wrapped up. Investor sentiment is neutral, but there was a drop in the number of bulls in both retail and pros.

The major averages may be due for an oversold bounce but whether it will have staying power is questionable and should keep investors cautious over the near-term. 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 -6, unchanged from the previous week. Cycles C and D are bullish, while Cycles A, B and E are bearish. If the DJIA is able to stay above 33306.30 next week, cycles A and B would reset and lead to a positive configuration for the CTI.

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, up a notch from the previous week. Breadth was negative at the NYSE as the Advance/Decline line dropped 1123 units while the number of new 52-week lows exceeded the number of new highs on five sessions. Breadth was also negative at the NASDAQ as the A/D line lost 526 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 rose to 23.0% vs. 21.6% the previous week, while those above their 200-day moving average eased to 37.9% vs. 38.7%. 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, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 9/27/23 shows outflows of $10.9 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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