Dow Drops For Seventh Straight Week
CNBC has revised their Option Action show which is aired every weekday night at 5:30. They have really beefed up the Friday show to the point that we think it is one of the best option oriented shows on the air. Check it out.
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
CNBC has revised their Friday Option Action show which is aired weekly at 5:30. The show has been beefed up to the point that we think it is one of the best option oriented shows on the air. Check it out.
Another volatile week had investors juggling hotter than expected inflationary data that sent the 10-year T-Bill rate as high as 3.20% and the S&P 500 flirting with a Bear market before ending the period with an oversold bounce. The major averages extended their losses to start the week as weak trade data out of China weighed on prices and sent oil prices sharply lower on demand concerns. The Energy (XLE) sector slipped -8.26% as oil prices eyed $100 a barrel, but closed the week at $110.30. Stocks tried to rebound on Tuesday, but traders faded the rally leaving the different indexes mixed. A higher-than-expected CPI number on Wednesday triggered rate fears and sent stocks sharply lower again with the NASDAQ dropping -3.18%. Stocks sank at the open on Thursday after the April PPI showed wholesale prices spiked +11% YOY and Cleveland Fed President Mester reiterated that the Federal Reserve was looking at 0.50-point rate hikes in June and July to rein in inflation. The different indexes were down on heavy volume, but some investors stepped in and bought the dip leading to an oversold bounce that left the market mixed. The late rally carried over to Friday and the DJIA was able to snap a six-day losing streak but the rally didn’t come close to erasing the week’s losses. Weakness was across the board with every sector except Consumer Staples (XLP) finishing in the red. REITs (XLRE), Consumer Discretionary (XLY), Technology (XLK) and Financials (XLF) were all down more than -3%. Yields were elevated on the inflationary data, but the 10-year T-Bill rate slipped back below 3% at Friday’s close after another Fed official reiterated that the committee wasn’t planning on a 0.75-point hike at future meetings. The major averages were able to go into the weekend on a high note but the DJIA extended its weekly losing streak to seven, its longest in 10-years, and the NASDAQ and S&P 500 were down for a sixth straight week.
For the period, the DJIA lost 702.71 points (-2.1%) and settled at 32196.66. The S&P 500 fell 99.45 points (-2.4%) and closed at 4023.89. The NASDAQ dropped 339.66 points (-2.8%) finishing at 11805.00. The small cap Russell 2000 gave up 46.89 points (-2.5%), finishing at 1792.67.
Market Outlook: The technical condition of the market deteriorated 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. The major averages are all trading below their 200 and 50-day moving averages (MA), confirming the downtrend. The NASDAQ remains in a Bear market and was 30% off its November high on Thursday, while the S&P 500 flirted with a Bear market down 19% from its January record high. Last week I posted targets for the major averages based on Fibonacci Retracement levels and several of those targets were hit this week. The different indexes were able to bounce off those levels as selling seemed to hit exhaustion levels on Thursday. Although we have not had what market technicians would refer to as a selling climax, the rally off Thursday’s low was marked by the highest volume day of the year for the NYSE and NASDAQ, and came off extreme oversold conditions which indicates that we could be near a tradeable bottom. The Market Edge/S&P Short Range Oscillator (SRO) closed Thursday at -8.25% and typically institutional investors step in when the SRO breeches -7%. In addition, stochastic readings for the different indexes had reached low single-digits and as of the close on Thursday, only 19.1% of stocks followed were trading above their 200-day MA. Furthermore, underlying breadth to close out the week showed investors were aggressively buying the bounce which could carry over into next week. Market internals are weak but showed positive divergence on Thursday and Friday which is also indicative of what one would look for at a market bottom. The NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, although sharply lower for the week, showed two-days of accumulation for the first time since mid-April. Another positive sign for a turnaround is that investor sentiment has reached extreme levels and, in some cases has fallen below levels last seen at the March 2020 low. Sharp drops in investor bullishness and stock exposure were evident this week in retail and institutional surveys.
Friday’s rally was broad-based and was the first Friday in five-weeks that the market closed higher. Investors are hoping that the Fed’s aggressive tightening in policy won’t lead to a slowdown or recession but there are other troubling factors that hint that the Fed won’t be able to maneuver a soft landing. What could derail a soft landing? Rising oil prices as rates are on the rise. According to Bloomberg, surging crude oil prices coupled with rising rates unhinged the economy in the mid-1970’s, the early 1980’s and early 1990’s. Another challenge for the stock market is midterm elections coming in November which could keep a lid on rallies. LPL Financial notes that due to the uncertainty of the election, stock returns are muted during this period though typically we see an end of year rally after the results. Bear markets and market bottoms are prone to volatile counter rallies and certainly this year’s selloff is no exception. Even though we could see more upside as the market bounces off very oversold levels, there is a chance the major averages retest this week’s lows. With more rate hikes coming, it would be prudent to remain cautious as investors could find the market stuck in a trading range until we get past the July FOMC Meeting.
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, unchanged from the previous week. Cycles B, C, D and E are bullish, while Cycle A is Bearish.
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 -6, down four notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line fell 2507 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 4136 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 16.7% vs. 24.8% the previous week, while those above their 200-day moving average dropped to 19.1% vs. 26.4%. 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 +7, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 5/11/22 shows outflows of $8.6 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 4/29/2022 (DJIA 32977.21).
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