Rally Stalls at Key Resistance
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
The different indexes tried to extend their gains off the June lows this week but rammed into stiff resistance at their respective 200-day moving average and finished the period lower. The major averages were able to shrug off weaker than expected manufacturing data out of China and the US to start the week and rode strong earnings from retailers Home Depot (HD) and Walmart (WMT) to new four-month highs. The DJIA was on a five-day win streak as investors waited on the release of the July FOMC Meeting minutes on Wednesday. Stocks initially rallied on the report but rolled over in the afternoon on comments from KC Fed President Tom Hoenig that the market is too enthusiastic about upcoming Fed moves on rates. Yields moved higher after the Fed minutes with the 2-year T-Bill finishing at 3.25%, while the 10-year rate closed at 2.98%. Higher yields also sent the US Dollar almost back to its high of the year, weighing on multi-nationals. The major averages tried to muster some buying on Thursday and closed with modest gains before taking a dive on Friday on selling in growth and big cap tech shares. Investors were defensive after weeks of gains with Consumer Staples (XLP), Utilities (XLU) and Energy (XLE) the strongest sectors. Communication Services (XLC), Materials (XLB), REITs (XLRE), Financial (XLF) and Technology (XLK) were the weakest sectors. Crude oil prices hit a six-month low during the week on demand concerns before closing at $90.09 a barrel. The major averages tumbled into the weekend ending the S&P 500 and NASDAQ’s four-week win streak, while the DJIA was down for the second time in three weeks.
For the period, the DJIA fell 54.31 points (-0.2%) and settled at 33706.74. The S&P 500 gave up 51.67 points (-1.2%) and closed at 4228.48. The NASDAQ lost 341.97 points (-2.6%) finishing at 12705.22. The small cap Russell 2000 dropped 59.27 points (-2.9%), finishing at 1957.35.
Market Outlook: The technical condition of the market showed some deterioration this week as the major averages failed to hold above a key moving average resistance level. The technical indicators finished mixed while coming off overbought levels. The DJIA outperformed and MACD, a short term trend gauge, remained positive, while Momentum, as measured by the 14-day RSI, was bullish but backed off an overbought level. The S&P 500 and NASDAQ saw MACD cross into bearish territory while momentum slowed but remained positive. Secondary indexes, which often will lead the broader market higher or lower underperformed the major averages issuing a red flag. The small cap Russell 2000 and Philadelphia Semiconductor Index were down -2.9% and -3.7% respectively, while the DJ Transportation Index slipped -2.5%. All of the different indexes finished the period back below key resistance at their 200-day MA. The Philadelphia Semiconductor Index selloff sent the index down to its 100-day MA. Underlying breadth was mixed with the NYSE and NASDAQ Advance/Decline lines losing ground after four weeks of gains, but new 52-week highs outdid the new lows on the NYSE for a second-straight week. Investor Sentiment is in neutral ground after weeks of being overly bearish. The American Association of Individual Investors (AAII) survey shows bearish investors hold a small edge over the bulls, while the National Association of Active Investment Managers (NAAIM) Exposure Index shows the professionals took some chips off the table and trimmed equity exposure back to 64.4% from 71.6% a week ago.
The major averages have rallied off the June lows on anticipation that inflation was at, or near a peak, and that the Federal Reserve would begin to be less assertive in hiking rates to battle inflation. As inflation soared to a 40-year high, the yield on the 10-year Treasury hit 3.48% mid-June and the S&P 500 and NASDAQ fell into a bear market. The yield curve inverted, signaling that bond traders feared a recession was on the horizon, and the rate on longer term T-Bills began to fall. The rate on the 10-year dropped to 2.57% as July was ending and investors rotated back into growth and technology stocks. This week’s release of the FOMC Meeting however, showed the Committee remained hellbent on tackling inflation. When I last checked, the CME Group FedWatch Tool had it almost a coin toss whether the Federal Reserve would raise rates 0.50 or 0.75-point at the September FOMC Meeting. That would bring the federal funds rate up to 3%, from 0.75% at the start of the year. Yields moved higher this week and were approaching those levels last seen in mid-June and the stock rally stalled. The Federal Reserve has about a month before its next meeting, and they will be data dependent, but the stock market may struggle here if rates stay elevated. If the major averages can’t break above resistance at their respective 200-day MA next week, investors may want to once again scale back on equities until we get a better read on how effective the Fed’s tightening cycle has been on reducing inflation. Rising rates and key resistance may be more than the stock market can handle after the recent rally.
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 Neutral at +1, down three notches from the previous week. Cycles B and E are bullish, while Cycles A, C and D are bearish. The CTI is projected to reset to a Negative configuration over the next week or two.
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 Positive at +8, down a notch from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 3381 units while the number of new 52-week highs exceeded the number of new lows on three sessions. Breadth was also mixed at the NASDAQ as the A/D line fell 4197 units while the number of new highs out did the new lows on three of the five days. Finally, the percentage of stocks above their 50-day moving average increased to 78.1% vs. 75.8% the previous week, while those above their 200-day moving average jumped to 40.8% vs. 34.1%. 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 Neutral at +0, down a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 8/17/22 shows inflows of $7.3 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 8/19/2022 (DJIA – 33706.74).
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