Stocks Struggle For Second Straight Week
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A volatile week whipsawed Wall Street as it weighed mixed economic data, soaring inflation and earnings from big banks that left the major averages lower on wild intra-day market swings. Stocks were under pressure to start the week but Monday’s -2.7% opening drop in the NASDAQ brought bargain hunters off the sidelines and the tech heavy NASDAQ managed to end the session in the plus column. Roller coaster trading left the major averages in positive territory on Tuesday and Wednesday after Fed Chair Jerome Powell soothed jittery investors with a softer tone on the Fed’s plan for battling inflation. Interest rates backed off recent highs and that triggered a broad-based rally led by gains in Energy (XLE), Technology (XLK), Communication Services (XLC) and Materials (XLB). Investors took a hotter than expected Consumer Price Index (CPI) in stride mid-week despite a 7% YoY jump, its biggest increase since June 1982! The bounce stalled as the week wrapped up however, as selling in growth and big cap technology shares slammed the different indexes. Market weakness was felt across the board with only the Energy (XLE) and Communication Services (XLC) sector able to post gains. REITS (XLRE), Consumer Discretionary (XLY), Utilities (XLU) and Financials (XLF) were the weakest market groups. The US Dollar was weaker but found support at its 100-day MA on Friday giving a boost to commodities, and crude oil prices closed the period at $84.15, its highest price since October. The CRB (Commodity) Index hit a new 52-week high on Thursday hitting a level last seen in late 2014. Friday’s mixed earnings from the Money Center banks and a dip in Retail Sales as shoppers stayed home due to omicron, sent equities sharply lower once again at the open before a late day rally erased most of the losses. When the dust settled the DJIA and S&P 500 ended the period down for a second straight week, and the NASDAQ lower for a third consecutive week.
For the period, the DJIA lost 319.85 points (-0.9%) and settled at 35911.81. The S&P 500 fell 14.18 points (-0.3%) and closed at 4662.85. The NASDAQ dropped 42.15 points (-0.3%) finishing at 14893.75, while the small cap Russell 2000 gave up 17.36 points (-0.8%), finishing at 2162.45.
Market Outlook: The technical condition of the market deteriorated this week with key support levels violated before the different indexes were able to firm at those areas. The technical indicators for the different indexes are now bearish with MACD, which measures the short-term trend, and Momentum, negative. The Dow Jones managed to regain its 50-day MA late Friday, but the S&P 500 is trading below its 50-day moving average (MA), and the NASDAQ struggled to hold support on Friday at its 200-day MA. The NASDAQ is also below the December lows opening the door for a dip to 14427 which was support in October. The S&P 500 also tested its rising trend line around 4580-4620 that has been in place since February of last year, falling to 4614 on Friday. The bellwether index has tested that support line six times since October and a break below that would target 4375. In addition, a break of 4580-4600 would violate a Head & Shoulders reversal pattern that also targets 4375, a drop of approximately 200-points from its recent high. Negative divergence is also seen in the secondary indexes as the DJ Transportation Index fell below its 50-day MA, while the drop in the small cap Russell 2000 has nearly wiped out all of the gains for 2021. Underlying breadth is also showing negative divergence with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, still losing ground showing most stocks are under distribution. The NYSE and NASDAQ A/D lines last made a new high the first week of November. Furthermore, new 52-week lows on the NASDAQ have outnumbered new highs for eight weeks in a row. Investor sentiment is mixed. Retail investors seem skittish with the latest American Association of Individual Investors (AAII) survey showing a drop in bullishness to the lowest level since mid-September. The pro’s also grew more cautious as the National Association of Active Investment Managers (NAAIM) Exposure Index slipped to 74.8%, down from 89.5% the previous week.
On top of soaring inflation and the Federal Reserve’s promise to tighten monetary policy to contain it, the market kicked off Q4 earnings with weaker-than-expected results from the Money Center banks. Next week we get earnings from a wide array of companies and investors will be looking for the impact omicron may have had on the results. That should keep volatility high. Expect choppy trading as investors continue to rotate into more defensive and cyclical sectors, but we’re likely to see traders scoop up technology shares as support areas come into play.
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 +7, down five notches from the previous week. Cycles B, D and E are bullish, while Cycles A and C are bearish. The CTI is projected to remain positive for at least one or two more weeks, but the negative divergence that is present in the technical indicators will shift the Market Posture to Neutral.
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 Neutral at -2, down five notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 98 units while the number of new 52-week highs exceeded the number of new lows on three of the five sessions. Breadth was negative at the NASDAQ as the A/D line lost 2680 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 48.4% vs. 50.2% the previous week, while those above their 200-day moving average rose to 53.0% vs. 52.2%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.
Sentiment Index (SI): Measuring the markets 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 +2, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 1/12/22 shows inflows of $9.9 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 1/14/2022 (DJIA – 35911.81).
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