Black Friday Pummels Stocks
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A rocky week kicked off with the S&P 500 and NASDAQ hitting new record intraday highs but ended with the major averages wiping out November’s gains on a new Covid variant scare. Investors cheered Fed Chair Jerome Powell’s nomination by President Biden on Monday, but the celebration was short lived as the focus returned to rising rates, inflation concerns and shutdowns in Europe due to spreading Covid cases. An increase in yields slammed growth stocks and the NASDAQ dropped 202.68 points (-1.26%). The DJIA led a reversal on Tuesday as investors rotated into cyclical and financial stocks, and the major averages were on firmer footing again on Wednesday as traders positioned themselves for a yearend rally. Global markets were battered on Friday however, after a report that a potentially more dangerous Covid variant was spreading in South Africa. Selling sent the different indexes sharply lower and the DJIA turned in its biggest one-day loss since 10/28/20. Weakness was across the board with Consumer Discretionary (XLY), Communication Services (XLC), Technology (XLK) and Industrials (XLI) down more than -2%, while only Energy (XLE) eked out a gain. Crude oil prices sank on fears that the global recovery would stall on spreading Covid, and oil closed the week down -9.6% at $68.76 a barrel. Yields were also down with the 30-year T-Bill rate finishing at 1.83% and the 10-year at 1.48%. Friday’s sell off put a damper on surging retail and reopening stocks and left hopes for a yearend rally in doubt. The short week ended with the DJIA and Russell 2000 down for a third consecutive week, while the S&P 500 and NASDAQ finished lower for the second time in three weeks.
For the period, the DJIA was down 702.64 points (-2.0%) and settled at 34899.34. The S&P 500 fell 103.34 points (-2.2%) and closed at 4594.62. The NASDAQ dropped 565.78 points (-3.5%) finishing at 15491.66, while the small cap Russell 2000 tumbled 97.23 points (-4.1%), finishing at 2245.93.
Market Outlook: The technical condition of the market deteriorated this week as intense selling on Friday wiped out all of the November gains. The technical indicators are negative for the different indexes with short-term trend gauges now in bearish territory. The Dow Jones broke below key moving average support levels trading below its 50 and 100-day moving average (MA), while the small cap Russell 2000 cracked below support at its 200-day MA. The S&P 500 and NASDAQ fared better staying above key support levels. Several sectors also fell below support areas showing growing weakness in the market with Communication Services (XLC), Energy (XLE), Financials (XLF) and Industrials (XLI) trading below their respective 50 and, or, 100-day MA. In addition, the DJ Transportation Index, Philadelphia Semiconductor Index and small cap Russell 2000 were the weakest indexes. Market technicians look to these averages as potential leaders of market direction. Underlying market breadth deteriorated further with the NYSE and NASDAQ Advance/Decline lines sloping lower and new 52-week lows outnumbering the new highs on both exchanges. This negative divergence in breadth has been evident for several weeks accenting that the major averages were susceptible to further weakness despite flirting with new highs. Investor Sentiment remained bullish going into Friday but had backed off extreme levels. However, Sentiment is likely to back step into neutral ground after Friday’s trouncing.
It’s too early to say that Santa may be out on Covid protocol, but investors counting on a yearend rally may need to take a wait-and-see approach as we head into December. Market participants were already concerned that shutdowns in Europe could slow growth and Friday’s report threw more fuel on the fire. With a lack of available news on the new strain coming out, it’s prudent for investors to wait a few days and see what unfolds before jumping back in and looking for bargains. The stock market usually overreacts, both higher and lower, to news however, investors may want to let the dust settle before making a move as implications could be more far reaching than just the coming week. The stock market finished the period oversold with the Market Edge/S&P Short Range Oscillator (SRO) falling to -4.86% which historically has led to some kind of bounce and could entice some buying at the open on Monday. Finally, last week’s downside target for the DJIA of 35200 was hit and points to limited downside from here.
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 +1, unchanged from the previous week. Cycles C, D and E are bullish, while Cycles A and B are bearish. The CTI is projected to remain in a positive configuration into year-end.
Momentum Index (MI): The markets 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 Neutral at +2, down two notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 2593 units while the number of new 52-week lows exceeded the number of new highs on three of the four sessions. Breadth was also negative at the NASDAQ as the A/D line declined 3832 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 55.1% vs. 60.5% the previous week, while those above their 200-day moving average slipped to 57.2% vs. 60.4%. 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 markets 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, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 11/17/21 shows outflows of $465 million.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 7/30/2021 (DJIA -34935.47).
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