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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Major Averages Tumble Ahead of FOMC Meeting
Bullish investors were hit with sticker shock this week as CPI (Consumer Price Index) and PPI (Producer Price Index) reports showed inflation was stickier than hoped, sending the major averages sharply lower. The market was on a four-day win streak before Tuesday’s higher-than expected core-CPI jumped +0.6% and +6.3% YoY, above estimates. Yields moved higher with the two-year Treasury rate hitting its highest level since November 2007 ending the week at 3.859%. The DJIA dropped 1276.37-points (-3.94%) and the NASDAQ tumbled -5.16% as investors dumped growth and technology stocks leaving every sector red. The different indexes put in a tepid bounce on Wednesday but mixed economic data on Thursday sent equities down again as analysts began calling for the Federal Reserve to tap the brakes on rate hikes to avoid a recession. A brutal overnight revenue warning from FedEx (FDX) slammed stocks again on Friday and the major averages were close to two-month lows before a late bounce. The selloff was across the board with every sector showing big losses with Materials (XLB), Industrials (XLI), Communication Services (XLC), REITs (XLRE) and Technology (XLK) all down more than -6%. As mentioned, yields moved higher in anticipation of a 0.75-point hike in rates at next weeks September FOMC Meeting. While crude oil prices were little changed during the period, the CRB (Commodity) Index nudged lower as the US Dollar muscled higher. After the dust settled on a volatile week the major averages had put in new lows for September, turning in their worst weekly performance since mid-June.
For the period, the DJIA lost 1329.29 points (-4.1%) and settled at 30822.42. The S&P 500 gave up 194.03 points (-4.8%) and closed at 3873.33. The NASDAQ dropped 663.91 points (-5.5%) finishing at 11448.40. The small cap Russell 2000 slipped 85.46 points (-4.5%), finishing at 1797.39.
Market Outlook: The technical condition of the market deteriorated this week as the major averages traded sharply lower and put in new lows for the month. The selloff left the different indexes oversold by several measures with stochastics in single digits. The technical indicators are now in negative territory with MACD, a short-term trend gauge, bearish and Momentum, as measured by the 14-day RSI, bearish and moving lower. Secondary indexes the DJ Transportation Index and Philadelphia Semiconductor Index, which market technicians like to see lead the market higher and lower, were the weakest indexes with the DJ Transports the first index to trade below the June/July lows, falling to its lowest mark since January 2021. The major averages had rallied above key moving average resistance levels earlier in September but fell back below those areas this week which is a negative and indicates that we should see at least a retest of the June lows. While every sector traded lower, there is some positive divergence in Healthcare (XLV), Energy (XLE) and Utilities (XLU) which represent defensive positions for investors. Underlying breadth deteriorated with the NYSE and NASDAQ Advance/Decline lines showing strong distribution, and new 52-week lows outnumbering new highs and expanding into the weekend. Last week’s bounce saw investor sentiment improve slightly but remained overly bearish with the American Association of Individual Investors (AAII) survey showing bullish retail investors rose to 26.1% from only 18.1% previously, while the National Association of Active Investment Managers (NAAIM) Exposure Index improved to 33.9% from 27.3% the week before. However, I’d expect to see these readings fall back into extreme bearish levels after this week’s drubbing.
Wall Street was overly optimistic that inflation had peaked and paid the price this week when core-CPI came in above estimates. While falling gasoline prices helped fuel those hopes, energy prices overall were higher on upticks in natural gas and electricity rates. Higher prices in medical care, rent, food and autos pushed the August core-CPI up to +6.3% YoY vs. +5.9% expected. That gave the Federal Reserve free rein to hike rates at next week’s FOMC Meeting at least 0.75-point as they target a future rate of 4-4.25%. If Fed Chair Jerome Powell’s comments later are viewed as hawkish for policy, we could see equities take another sharp leg lower. That could tempt investors to jump all in, but those hoping for a rapid rise in equity prices into year-end may be disappointed. Over the last few years, older investors have had to buy stocks and look for dividends to supplement income as bonds have provided a negative return. After years of volatility with little to show in the stock market, bonds are once again looking attractive and some analysts think they should finally be a part of one’s portfolio. If, as I expect, we see retired and older investors diversify into the safety and guaranteed returns of bonds as yields move higher, it could be a long road before we see demand for equities push the stock market to new highs.
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 -8, down a notch from the previous week. Cycle E is bullish, while Cycles A, B, C and D are bearish. The CTI is projected to remain in a negative configuration into October.
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 three notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 3540 units while the number of new 52-week lows exceeded the number of new highs on four of the five sessions. Breadth was also negative at the NASDAQ as the A/D line fell 3901 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 30.6% vs. 40.5% the previous week, while those above their 200-day moving average eased to 23.6% vs. 25.5%. 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 +3, down a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 9/14/22 shows outflows of $12.7 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bearish as of the week ending 8/26/2022 (DJIA – 32283.40).
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Question: What Is IV Rank (IVR) And IV Percentile (IVP) And Why Do I Care?
Answer: Implied volatility rank (IVR) is a statistic measurement used when trading options. It reports how the current level of implied volatility in a given underlying compares to the last 52- weeks of historical data. That means if implied volatility ranged between 30% and 60% during the last 52 weeks in stock XYZ, and implied volatility is currently at 45%, XYZ would have an implied volatility rank of 50.
Similar to implied volatility rank, implied volatility percentile (IVP) provides insight into the current level of implied volatility as compared to the last 52 weeks of data. Implied volatility percentile reports the percentage of days over the last 52- weeks that implied volatility traded below the current level of implied volatility. Market participants can use both IV rank and IV percentile in conjunction with each other to assess the current level of implied volatility in a given underlying as compared to the last 52 weeks of data. Generally speaking, market participants often view elevated levels of IV rank and IV percentile as attractive for selling options when it is over 50 and great when it is over 80. Depressed levels of IV rank and IV percentile, under 20 are viewed as attractive levels when buying options.
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