Stocks Slump On Rising Rates
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
A Friday selloff pulled the major averages down for the week a day after Fed Chair Jerome Powell cemented the case for at least a 0.50-point rate hike at the May FOMC meeting to battle inflation. Investors were able to shake off rising rates early in the week as Q1 earnings from International Business Machines (IBM), Johnson & Johnson (JNJ) and Proctor & Gamble (PG) sent stocks sharply higher on Tuesday. The bounce struggled on Wednesday however, after Netflix (NFLX) surprised traders with a miss in revenues and a falloff in subscribers. The stock dropped -35% and other streaming media providers including Walt Disney (DIS), Meta Verse (FB) and Alphabet (GOOGL) tumbled in sympathy. Fed Chair Powell’s hawkish comments at the IMF Global Debate on Thursday sent yields sharply higher and stocks lower despite strong earnings from Tesla (TSLA), Dow Chemical (DOW), American Airlines (AAL) and United Airlines (UAL). The rate on the 10-year Treasury jumped to 2.95%, its highest level since 12/2018, before closing the week at 2.896%. The different indexes plunged again on Friday in a broad based selloff that left every sector red. On the week, defensive sectors REITs (XLRE) and Consumer Staples (XLP) outperformed with small gains, while Communication Services (XLC) dropped -7.76% on the drop in Netflix and was the worst performing sector. The Energy (XLE) sector was also sharply lower, losing -4.57%, on slowing growth concerns. Materials (XLB), Healthcare (XLV) and Technology (XLK) also lagged the broader market. Friday’s selloff left the major averages at the lows of the week and the DJIA extended its weekly losing streak to four, while the S&P 500 and NASDAQ fell for a third consecutive week with the NASDAQ closing the period in bear market territory.
For the period, the DJIA fell 639.83 points (-1.9%) and settled at 33811.40. The S&P 500 sank 120.81 points (-2.8%) and closed at 4271.78. The NASDAQ dropped 511.79 points (-3.8%) finishing at 12839.29. The small cap Russell 2000 gave up 64.32 points (-3.2%), finishing at 1940.66.
Market Outlook: The technical condition of the market deteriorated again this week as the major averages traded down and extended their weekly losing streaks. The technical indicators for the different indexes are negative with MACD, a short-term trend gauge, in bearish territory and Momentum, as measured by the 14-day RSI, negative and slowing. The major averages are all trading below their 200 and 50-day moving averages (MA), confirming the downtrend. The NASDAQ, Philadelphia Semiconductor Index and small cap Russell 2000 ended the period in a Bear market. However, on a positive note the DJ transportation Index was able to close out the week higher on strong earnings from the airlines. Defensive sectors REITs (XLRE) and Consumer Staples (XLP) were positive and continue to outperform the broader market in a rotation to safety. Year-to-date only Energy (XLE), Utilities (XLU) and Consumer Staples (XLP) remain in the plus column, while growth sectors Communication Services (XLC), Technology (XLK) and Consumer Discretionary (XLY) are the biggest percentage losers. So far, except for Communication Services (XLC), the different sectors have been able to hold above the February-March lows which could provide support and keep the major averages in a trading range until the May FOMC Meeting. A break below those levels by other sectors would be negative for the broader market and could induce more selling in equities. Underlying breadth remains weak with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, continuing to lose ground, while stocks making new 52-week lows outnumber new highs by a wide margin, matching the numbers from early March lows. Investor sentiment remains overly bearish, but there was a small uptick in the percentage of bulls in retail investors this week. The professionals were mixed with Investors Intelligence reporting the Percentage of Bullish Investment Advisors falling to 32.1%, its lowest number since mid-March, while the National Association of Active Investment Managers (NAAIM) Exposure Index showed an increase in equity holdings to 74% from 63.3% the previous week.
This week Goldman Sachs’ Chief Economist Jan Hatzius warned there was a 35% chance of a recession in the US in the next year due to soaring inflation and the war in Ukraine. Goldman Sachs also trimmed their growth expectations for the economy to +1.75% noting higher food and gas prices will slow consumer spending. The next FOMC Meeting is May 3-4 and we’re now getting grumblings that perhaps a 0.75-point hike may be in order. A runaway train doesn’t stop on a dime and it’s going to take longer than most market participants think to dent soaring inflation. The shift in monetary policy by the Federal Reserve is going to increase the risk of an economic slowdown but committee members need to be careful that they’re not on the path of raising rates too far, too fast. While the different indexes look to be in a trading range ahead of that meeting, investors need to remain cautious and perhaps raise cash levels until we can see whether the Fed is up to navigating a soft landing for the economy. Friday’s trading action looks to me like investors are beginning to price in a recession.
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 +9, down a notch from the previous week. Cycles B, C, D and E are bullish, while Cycle A is Bearish. The CTI is projected to remain in a Bullish configuration until June.
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 four notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line fell 2892 units while the number of new 52-week lows exceeded the number of new highs on four sessions. Breadth was also negative at the NASDAQ as the A/D line lost 4495 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 44.5% vs. 46.3% the previous week, while those above their 200-day moving average increased to 38.6% vs. 37.9%. 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 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 +5, up two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 4/20/22 shows outflows of $14.7 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 3/18/2022 (DJIA – 34754.93).
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If you are initiating a Bearish 100.0 – 105.0 vertical call-credit spread, add the credit ($2.00) to the short call strike price (100.0) to get the BE price ($102.00) for the trade. If the underlying settles at $102.00 or lower, the trade will make at least a $0.01 profit. Check the TOS, Analyze screen. The percentage below the BE price line is the POP for the bearish call-credit spread.
Bullish Vertical Put Credit Spread: 1) Subtract The Credit From Short Put SP = BE Price. 2) The % Above The BE Price On The Analyze Screen Is The POP For The Trade.
Bearish Vertical Call Credit Spread: 1) Add The Credit To The Short Call SP =BE. 2) The % Below The BE Price On The Analyze Screen Is The POP For The Trade.
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