S&P 500 Slides Into A Correction
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Another volatile week of trading saw the major averages pummeled to start the period, stage a relief rally midweek, before selling off ahead of the weekend. Global markets struggled on Monday as fighting between Russia and Ukraine escalated sending crude oil prices briefly above $130 a barrel before settling at $109.22 on Friday. A -4.91% drop in the Philadelphia Semiconductor Index that same day helped send the NASDAQ down -3.62% and into a Bear market. Stocks staged a powerful relief rally on Wednesday that snapped a four-day losing streak on a report that the UAE would increase oil production to help supply shortages that helped trim oil prices. The DJIA surged 653.61 points (+2.00%) in a broad based rally led by technology and banking shares. A red-hot Consumer Price Index (CPI) on Thursday showed consumer prices spiking +7.9% YoY, the sharpest annual increase in 40 years, and that sent the different indexes tumbling into the weekend. The VIX, or volatility index, has been above 30 for 12 of the last 13 sessions showing traders are cautious and concerned that further downside could be in store for equities and investors were reluctant to buy the dips. Defensive assets outperformed with gold rising above $2000 an ounce for the first time since April 2020, but finished the period at $1988.00. While yields dipped early in the week, the rate on the 10-year T-Bill climbed back to 2% on Friday in anticipation of the Federal Reserve hiking rates at next week’s FOMC Meeting. The Energy (XLE) sector was again the only market group showing gains this week and is up +40% year to date. Utilities (XLU) posted a new record high on Tuesday, but closed the week with a slight loss. The weakest market sectors were Consumer Staples (XLP), Technology (XLK), Communication Services (XLC) and Consumer Discretionary (XLY). The S&P 500 and NASDAQ finished lower for the fourth time in five weeks, while the DJIA was down for a fifth consecutive week, its longest losing streak since May 2019.
For the period, the DJIA lost 670.61 points (-2.0%) and settled at 32944.19. The S&P 500 gave up 124.56 points (-2.9%) and closed at 4204.31. The NASDAQ dropped 469.63 points (-3.5%) finishing at 12843.81. The small cap Russell 2000 fell 21.23 points (-1.1%), finishing at 1979.67.
Market Outlook: The technical condition of the market deteriorated this week as the S&P 500 ended the week in correction territory and the NASDAQ fell into a Bear market. The technical indicators for the DJIA, S&P 500 and NASDAQ are in negative ground, but Wednesday’s bounce helped the indexes work off some of their oversold condition with stochastics crossing back above 20. Stocks are still oversold by some measures however with the Market Edge/S&P Short Range Oscillator (SRO) closing Friday at -4.42%, while only 32% of equities are trading above their 50 and 200-day MA. The major averages have made a series of lower highs and lower lows which confirms the downtrend and every index finished the period below their respective 200-day MA. The DJ Transportation Index and Russell 2000 showed some positive divergence however, with their technical indicators rising into neutral ground and MACD, which gauges the short-term trend, showing a bullish crossover on the transports chart. Underlying market breadth remains bearish with volume much heavier on down days. The NYSE and NASDAQ Advance/Decline lines show most stocks remain under distribution and have been in a steady decline since November 2021, also confirming the negative action. New 52-week lows continue to outnumber new highs and expanded on the down days, hitting their highest totals in two weeks. Investor sentiment once again shows bearish sentiment has reached an extreme level that hints that the market is looking for a bottom. While we saw a small uptick in bullishness by active money managers and hedge funds, retail investors saw an increase in the number of bears.
The Ukraine invasion continues to disrupt global markets as investors weigh the impact of sanctions and supply chain issues. As mentioned last week, analysts are cutting earnings and growth projections for the second half of 2022 and those estimates are sure to be adjusted lower the longer Putin’s war lingers. Goldman Sachs cut GDP for the US and Europe this week and a flattening of the yield curve now hints that the Federal Reserve may struggle to prevent a recession while tightening monetary policy to battle inflation. Next week the March FOMC Meeting begins and while a 0.25-point hike in rates seems certain, investors will be tuned in on the committee’s outlook for further tightening as the Russia-Ukraine conflict rages on. That could keep a lid on prices over the near-term despite oversold relief rallies off headlines.
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 Negative at -3, down four notches from the previous week. Cycles A, D and E are bullish, while Cycles B and C are bearish. It’s possible the low in the DJIA from the week ending 2/25/22 represented a bottom that would lead to a reset of cycles A, B and C and a positive configuration for the CTI. However, further deterioration in the technical condition of the market will push a reset of the cycles out for possibly another few weeks.
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, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 2314 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 2776 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 32.7% vs. 36.3% the previous week, while those above their 200-day moving average slipped to 32.6% vs. 36.3%. 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 marketís 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 +7, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 3/09/22 shows inflows of $12.5 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).
Another volatile week of trading saw the major averages pummeled to start the period, stage a relief rally midweek, before selling off ahead of the weekend. Global markets struggled on Monday as fighting between Russia and Ukraine escalated sending crude oil prices briefly above $130 a barrel before settling at $109.22 on Friday. A -4.91% drop in the Philadelphia Semiconductor Index that same day helped send the NASDAQ down -3.62% and into a Bear market. Stocks staged a powerful relief rally on Wednesday that snapped a four-day losing streak on a report that the UAE would increase oil production to help supply shortages that helped trim oil prices. The DJIA surged 653.61 points (+2.00%) in a broad based rally led by technology and banking shares. A red-hot Consumer Price Index (CPI) on Thursday showed consumer prices spiking +7.9% YoY, the sharpest annual increase in 40 years, and that sent the different indexes tumbling into the weekend. The VIX, or volatility index, has been above 30 for 12 of the last 13 sessions showing traders are cautious and concerned that further downside could be in store for equities and investors were reluctant to buy the dips. Defensive assets outperformed with gold rising above $2000 an ounce for the first time since April 2020, but finished the period at $1988.00. While yields dipped early in the week, the rate on the 10-year T-Bill climbed back to 2% on Friday in anticipation of the Federal Reserve hiking rates at next week’s FOMC Meeting. The Energy (XLE) sector was again the only market group showing gains this week and is up +40% year to date. Utilities (XLU) posted a new record high on Tuesday, but closed the week with a slight loss. The weakest market sectors were Consumer Staples (XLP), Technology (XLK), Communication Services (XLC) and Consumer Discretionary (XLY). The S&P 500 and NASDAQ finished lower for the fourth time in five weeks, while the DJIA was down for a fifth consecutive week, its longest losing streak since May 2019.
For the period, the DJIA lost 670.61 points (-2.0%) and settled at 32944.19. The S&P 500 gave up 124.56 points (-2.9%) and closed at 4204.31. The NASDAQ dropped 469.63 points (-3.5%) finishing at 12843.81. The small cap Russell 2000 fell 21.23 points (-1.1%), finishing at 1979.67.
Market Outlook: The technical condition of the market deteriorated this week as the S&P 500 ended the week in correction territory and the NASDAQ fell into a Bear market. The technical indicators for the DJIA, S&P 500 and NASDAQ are in negative ground, but Wednesday’s bounce helped the indexes work off some of their oversold condition with stochastics crossing back above 20. Stocks are still oversold by some measures however with the Market Edge/S&P Short Range Oscillator (SRO) closing Friday at -4.42%, while only 32% of equities are trading above their 50 and 200-day MA. The major averages have made a series of lower highs and lower lows which confirms the downtrend and every index finished the period below their respective 200-day MA. The DJ Transportation Index and Russell 2000 showed some positive divergence however, with their technical indicators rising into neutral ground and MACD, which gauges the short-term trend, showing a bullish crossover on the transports chart. Underlying market breadth remains bearish with volume much heavier on down days. The NYSE and NASDAQ Advance/Decline lines show most stocks remain under distribution and have been in a steady decline since November 2021, also confirming the negative action. New 52-week lows continue to outnumber new highs and expanded on the down days, hitting their highest totals in two weeks. Investor sentiment once again shows bearish sentiment has reached an extreme level that hints that the market is looking for a bottom. While we saw a small uptick in bullishness by active money managers and hedge funds, retail investors saw an increase in the number of bears.
The Ukraine invasion continues to disrupt global markets as investors weigh the impact of sanctions and supply chain issues. As mentioned last week, analysts are cutting earnings and growth projections for the second half of 2022 and those estimates are sure to be adjusted lower the longer Putin’s war lingers. Goldman Sachs cut GDP for the US and Europe this week and a flattening of the yield curve now hints that the Federal Reserve may struggle to prevent a recession while tightening monetary policy to battle inflation. Next week the March FOMC Meeting begins and while a 0.25-point hike in rates seems certain, investors will be tuned in on the committee’s outlook for further tightening as the Russia-Ukraine conflict rages on. That could keep a lid on prices over the near-term despite oversold relief rallies off headlines.
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 Negative at -3, down four notches from the previous week. Cycles A, D and E are bullish, while Cycles B and C are bearish. It’s possible the low in the DJIA from the week ending 2/25/22 represented a bottom that would lead to a reset of cycles A, B and C and a positive configuration for the CTI. However, further deterioration in the technical condition of the market will push a reset of the cycles out for possibly another few weeks.
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, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 2314 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 2776 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 32.7% vs. 36.3% the previous week, while those above their 200-day moving average slipped to 32.6% vs. 36.3%. 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 marketís 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 +7, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 3/09/22 shows inflows of $12.5 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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Question: What is the VIX Index and how is it calculated?
VIX is the ticker symbol for the CBOE’s volatility index. It shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. It is a widely used measure of market risk and is also referred to as the “investor Fear Gauge”.
The CBOE designed the VIX to create various volatility products. VIX was the first successful attempt at creating and implementing such an index. Introduced in 1993, it was originally a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, in 2004, it was expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors’ expectations of future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility because of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent times in the markets.
VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option’s expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks.
While there is not a way to directly trade the VIX, the CBOE does offer VIX options, which have a value based on VIX futures and not the VIX itself. Additionally, there are 24 other volatility exchange-traded products (ETPs) for the VIX, bringing the total number to 25.
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