Volatile Week Ends With Major Averages Higher
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The week seemed to go from bad to worse as the major averages fell into correction mode with the NASDAQ flirting with a bear market before a Friday surge left the DJIA, S&P 500 and NASDAQ higher for the period. Against a backdrop of the Federal Reserve’s more hawkish monetary policy pivot, mixed earnings and increasing geopolitical tensions, investors were whipsawed by daily triple-digit swings in the S&P 500. A 1,000-point selloff in the DJIA and a -4.89% drop in the NASDAQ to start the week, rattled investors on Monday before the indexes snapped back late in the session to post small gains. Traders hit the replay button on Tuesday as another steep selloff reversed course but faded at the close. Hoping for dovish comments to settle markets from Fed Chair Jerome Powell after the January FOMC concluded, stocks staged another rally on Wednesday at the open. Investors sold the rally however, as comments from Powell were more hawkish than expected and the different indexes tumbled into the close on Thursday before once again jumping higher ahead of the weekend. Economic data and earnings were mixed as supply chain issues led to disappointing results and slower growth. Earnings from General Electric (GE), Boeing (BA), Chevron (CVX), Intel (INTC), Lam Research (LRCX), Robin Hood (HOOD) and others came up short, but there were pockets of strength as Microsoft (MSFT), Visa (V) and Apple (AAPL) blew away estimates. Apples stellar report helped lift the indexes off the mat on Friday. The late week rally left the sectors mixed led by a +5.09% spike in Energy (XLE) after crude oil and gas prices moved higher. Technology (XLK), Financials (XLF), Healthcare (XLV) and Communication Services (XLC) also finished higher. Industrials (XLI), Consumer Discretionary (XLY), Materials (XLB) and Utilities (XLU) closed red. Yields were on the rise after the Fed’s Wednesday statement, hitting a high of 1.87% on the 10-year T-Bill before settling at 1.77%. While crude oil prices increased for a sixth straight week to $87.29 a barrel, Natural Gas prices surged 46% on Thursday ahead of a brutal storm and freezing temperatures expected to hit the northeast over the weekend. A jump in the US Dollar to its highest level since July 2020 sent gold prices to a six-week low of $1786.00. The major averages were able to catch a bid on Friday and the NASDAQ was able to avoid its worst weekly losing streak since 2012, while the DJIA and S&P 500 snapped a three-week tumble.
For the period, the DJIA picked up 462.10 points (+1.3%) and settled at 34725.47. The S&P 500 added 34.51 points (+0.8%) and closed at 4431.85. The NASDAQ eked out a 1.65 point (+0.0%) gain finishing at 13770.57, while the small cap Russell 2000 lost 19.41 points (-1.0%), finishing at 1968.51.
Market Outlook: The technical condition of the market deteriorated again this week as the major averages traded down through key long-term moving average (MA) support levels. The technical indicators are all bearish but have slipped into oversold territory which could lead to a bounce or relief rally over the near-term. All the major averages are below their 200-day MA and despite Friday’s rally the S&P 500’s run stalled at its 200-day MA. In addition, secondary indexes the DJ Transportation Index, Russell 2000 and Philadelphia Semiconductor Index, which usually lead the market higher and lower, all took out Monday’s low late and closed the week lower. The Russell 2000 is now in a bear market, down more than -20% from its high mark and has erased all the 2021 gains. Despite some dip buying during the period, internal market breadth remains very negative with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, both losing significant ground showing heavy distribution in stocks. The NYSE A/D line last made a new high on 11/08/21 and retraced back to May 2021 levels. In addition, the number of new 52-week lows continue to expand on both the NYSE and NASDAQ, while the number of new highs has been anemic. The NASDAQ has recorded more new lows than highs for the past 11-weeks. Investor Sentiment, however, is excessively bearish and may be signaling investors could begin to look for equities that are positioned for long term fundamental growth. Sentiment indicators are viewed as contrarian signs when they near extreme levels. The recent American Association of Individual Investors (AAII) survey shows bearish sentiment rose to its highest level since 2013, while bullish sentiment has been below the historical level of 38% for 10 consecutive weeks.
This week Fed Chair Jerome Powell surprised the market by signaling the Federal Reserve is open to raising rates at every FOMC Meeting this year to curb inflation. That triggered speculation that perhaps a half-point uptick in rates could be on the slate for March, which would rattle the market further. As of Friday, the CME Fed Watch Tool has risen to a 12.4% chance that the Fed could hike rates a half-point in March, up from 4.6% just over a week ago. The probability of at least a quarter-point adjustment is at 100%.
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 A, B, D and E are bullish, while Cycle C is bearish. The CTI is projected to move into negative ground shortly.
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 -4, down four notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 2639 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 lost 4065 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 dropped to 22.9% vs. 31.7% the previous week, while those above their 200-day moving average fell to 27.2% vs. 37.8%. 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 Positive at +4, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 1/26/22 shows outflows of $4.1 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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