Major Averages Ease Into 2022
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The DJIA, S&P 500, DJ Utility Index and Philadelphia Semiconductor Index were able to punch new record highs this week as the ‘Santa rally’ capped off a strong year with solid gains that were spread across almost every sector. The week kicked off on a high note with Mastercard reporting a +8.5% YoY increase in retail sales and hopes that the Omicron variant would prove to be more manageable than Covid-19. Led by strength in big cap tech names the major averages jumped more than +1% on Monday with the NASDAQ leading the charge surging 217.89-points (+1.39%). Low holiday volume added to volatility and the different indexes traded mixed before the Dow Jones joined the S&P 500 at an all-time high on Wednesday. The blue-chip index snapped a six-day win streak on Thursday however, as investors closed out tax-selling in preparation for possible higher capital gains taxes in 2022. The markets makeup took a more defensive posture as the week and year ended with REITs (XLRE), Utilities (XLU), Materials (XLB), Consumer Staples (XLP) and Industrials (XLI) sporting the biggest gains, while only Communication Services (XLC) closed in the red. Technology (XLK), Financials (XLF) and Consumer Discretionary (XLY) also lagged the broader market. While longer-term Treasury yields were little changed, the 2-year Treasury rate inched higher, hitting its high mark of the year on Tuesday at 0.766%, before settling at 0.73%. Crude oil prices were also higher closing at $75.50 a barrel, its highest level in a month. The major averages wavered as the week was ending, but the Santa rally doesn’t officially end until the after the second trading day of January. The market finished mostly higher for a second straight week and if old St. Nick can steer clear of the Omicron virus we could see the major averages extend that weekly win streak to three. That would be the longest win streak since the end of October.
For the period, the DJIA added 387.74 points (+1.1%) and settled at 36338.30. The S&P 500 added 40.39 points (+0.9%) and closed at 4766.18. The NASDAQ eased 8.40 points (-0.1%) after Friday’s weakness finishing at 15644.97, while the small cap Russell 2000 tacked on 3.73 points (+0.2%), finishing at 2245.31.
Market Outlook: The technical condition of the market was mixed this week as new highs by the DJIA, S&P 500 and DJ Utility Index were offset by four days of losses in the NASDAQ. The technical indicators remained mostly positive for the major averages but finished mixed for the NASDAQ, Russell 2000 and DJ Transportation Index. After back-and-forth trading during December, negative divergence is showing once again in several of the indicators which could signal that the stock market could struggle in the New Year. Despite new highs by the DJIA and S&P 500, the 14-day RSI was unable to confirm the highs showing much less momentum in the latest rally, a bearish sign. Another warning is that secondary indexes the Russell 2000 and DJ Transportation Index, which market technicians would like to see leading the indexes, are struggling to keep pace with the S&P 500. After a failed breakout and selloff by the small cap Russell 2000, the index has stalled at the 50% retracement of the November to December decline and once again remains range bound. Underlying internal breadth is also showing negative divergence. The NYSE Advance/Decline line, a leading indicator of market direction, has improved over the last two weeks but last made a new high on 11/08/21. The NASDAQ A/D line has been in a steady decline since early November. Finally, while this week the NYSE was able to record more new 52-week highs than lows for the first time in five weeks, the NASDAQ has only had one session since 11/17/21 that the index put up more new highs than lows. This all points to a narrowing in leadership in the recent rally and a top-heavy market. Investor sentiment is neutral, but we saw both retail and institutional investors increase exposure to equities over the last week.
The stock market wrapped up a strong year with a solid December and while the current rally still has potential to work higher, I doubt that 2022 will feel like a market on cruise control. Over the near-term, the spread of Omicron will certainly weigh on equities, especially travel and some reopening plays. Another headwind is supply chain issues. Though likely to diminish the first half of the year, trouble getting product and materials to companies will still affect earnings. In addition, how the Federal Reserve reacts to rising inflation is sure to whipsaw investors. Despite those concerns, for now equities remain the place to be. However, it won’t hurt to have a more balanced and defensive portfolio to weather what 2022 may have in store.
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 +12, unchanged from the previous week. Cycles B, C, D and E are bullish, while Cycle A is bearish. The CTI is projected to remain positive into January.
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 +3, up three notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2536 units while the number of new 52-week highs exceeded the number of new lows on all five sessions. Breadth was negative at the NASDAQ as the A/D line lost 1567 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 48.7% vs. 39.2% the previous week, while those above their 200-day moving average increased to 53.5% vs. 48.8%. 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 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 Neutral at +1, down a from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 12/29/21 shows inflows of $24.6 billion.
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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