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

Stocks Slip on Soaring Inflation

Stocks struggled during the week as soaring inflation and mixed earnings stoked recession fears, keeping investors on edge. The major averages were able to trim losses on Friday however, as a better-than-expected June Retail Sales number showed higher rates hadn’t slowed consumer spending. Equities drifted lower to start the period as China looked to impose new lockdowns on spreading Covid concerns, and US economic data showed deteriorating sentiment and growth. A hot Consumer Price Index (CPI) number sent stocks reeling at the open on Wednesday as inflation spiked +9.1% in June, the largest gain since 1981. The Dow Jones dipped more than 400-points before cutting the drop in half by the close. That was followed up with the June Producer Price Index (PPI) jumping +11.3% YoY sending stocks sharply lower again on Thursday, but investors bought the dip and the different indexes were able to finish the session mixed. Q2 earnings from the Money Center Banks didn’t help as JP Morgan Chase (JPM) and Morgan Stanley (MS) both missed estimates sending the Financial (XLF) sector to a new 52-week low. Friday’s bounce off the Retail Sales number and solid earnings from United Health Group (UNH) and Citi Group (C) snapped a five-day losing streak for the DJIA as the blue-chip index jumped 658.09 points (+2.15%) and nearly pushed the Dow into the plus column. Commodity prices continued to tumble on slower growth concerns and crude oil prices dropped to $90.95 a barrel on Thursday before climbing back to $97.31 as the week ended. Copper, a measure of economic expansion, fell to a 20-month low and the CRB Commodity Index fell another 4% before finding support at its 200-day MA. Investors remained on defense and only the Consumer Staples (XLP) sector was able to post positive, while Utilities (XLU) and REITs (XLRE) also outperformed. Weakness in oil left the Energy (XLE) sector down -3.33% with Communication Services (XLC), Industrials (XLI) and Materials (XLB) also lagging the broader market. Despite Friday’s rally the major averages closed the week lower as Q2 earnings kicked off.

For the period, the DJIA lost 49.89 points (-0.2%) and settled at 31288.26. The S&P 500 gave up 36.22 points (-0.9%) and closed at 3863.16. The NASDAQ fell 182.88 points (-1.6%) finishing at 11452.42. The small cap Russell 2000 slipped 24.99 points (-1.4%), finishing at 1744.37.

Market Outlook: The technical condition of the market was little changed this week with most indicators finishing in neutral ground. Momentum is at a standstill with the 14-day RSI finishing the week at 50, the mid-point line. After seeing some signs of positive divergence in the market by the secondary indexes, those indexes were some of the weaker performers this week with the DJ Transportation Index hitting a new intraday low for the year on Thursday. The Philadelphia Semiconductor Index however, was the only index able to punch out a gain. Despite Friday’s surge, the major averages face significant resistance at the June highs, which also coincides closely with the 50-day MA for the DJIA and S&P 500. A move to the June high in the NASDAQ would push the tech heavy index above its 50-day MA. Underlying breadth was also negative with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, losing ground and new 52-week lows expanding all week until Friday. Investor Sentiment was little changed and remains overly bearish. Although there was a small increase in the number of bulls in both the American Association of Individual Investors (AAII) and the Percentage of Bullish Investment Advisors, the National Association of Active Investment Managers (NAAIM) Exposure Index saw a small decline in stock exposure.

It has been a brutal eight-months for stocks, and the major averages are still only a chip shot off the lows of the year. However, despite soaring inflation numbers and another 0.75-point rate hike in the cards for July, there were signs this week that perhaps we’ve seen peak inflation. Core CPI, minus food and energy, showed some deceleration up +5.9% YoY. In addition, commodities, including crude oil prices, have fallen into a bear market pointing to expectations for slower growth and demand. Investors remain fearful that the economy will tip into a recession, and it is my opinion that we’re already in one. The inverted yield curve indicates bond investors agree. The stock market tends to look forward six-months and if that is the case, even if inflation shows signs of receding investors may need to brace for more pain and not ‘fight the Fed’. Friday’s rally on better-than-expected earnings was a welcome relief, but investors may want to remain defensive until we hear Fed officials slip ‘pause’ into their rhetoric on aggressive rate hikes.

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 +6, unchanged from the previous week. Cycles B, C and E are bullish, while Cycles A and D are bearish. The CTI is projected to remain positive 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 +5, down three notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 441 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 fell 2716 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 23.9% vs. 30.5% the previous week, while those above their 200-day moving average dropped to 13.5% vs. 17.0%. 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 Positive at +6, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 7/13/22 shows outflows of $3.1 billion.

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 6/24/2022 (DJIA – 31500.68).

Ask Mr. Seifert

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