S&P 500 Teeters On Bear Market
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
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The bulls nosed the gate early in the week on better-than-expected economic data, but hawkish comments from Fed Chair Jerome Powell midweek rattled investors. Saying the Federal Reserve would have to act more aggressively if inflation didn’t come down, rates moved higher and equities lower as the majors averages extended their weekly losing streaks. The stock market initially shrugged off Powell’s remarks but the yield on the 10-year Treasury jumped back above 3% on Wednesday and investors headed for the exits. The DJIA dropped 1164.52 points (-3.57%), its biggest one-day point loss since June 2020, while the NASDAQ tumbled -4.73% on selling in big cap tech and semiconductors. The selloff was across the board with disappointing earnings from Walmart (WMT) and Target (TGT) pulling the SPDR S&P Retail ETF (XRT) down -8.29%. Mixed earnings on Thursday saw the major averages sink further and the DJIA and S&P 500 put in new closing lows for the year. A volatile options expiration on Friday saw the DJIA swing in an 880-point range before a late rally left the different indexes flat. Crude oil prices ended the period higher at $112.70 a barrel as Europe took steps to wean itself off Russian oil. The Energy (XE) sector was one of the few positive areas of the market up +1.23%. Healthcare (XLV) and Utilities (XLU) also eked out gains with the iShares Biotechnology ETF (IBB) nudging higher for a second week gaining +2.2%. Consumer sectors were the weak spots with Consumer Staples (XLP) falling -8.12% and Consumer Discretionary (XLY) sinking -7.82% taking the biggest hits, while Industrials (XLI) and Technology (XLK) were also sharply lower. After rising back above 3%, the rate on the 10-year T-Bill fell back to 2.79% on growth concerns as more analysts questioned the Fed’s ability to avoid a recession while tightening policy to stem inflation. The DJIA went into the weekend down for an eighth consecutive week, its longest losing streak since 1923, while the S&P 500 and NASDAQ were down for a seventh straight week, their longest since 2001.
For the period, the DJIA lost 934.76 points (-2.9%) and settled at 31261.90. The S&P 500 fell 122.53 points (-3.0%) and closed at 3901.36. The NASDAQ dropped 450.38 points (-3.8%) finishing at 11354.62. The small cap Russell 2000 gave up 19.40 points (-1.1%), finishing at 1773.27.
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 and moving lower. The major averages are all trading below their 200 and 50-day moving averages (MA) with the 50-day MA below the 200-day MA confirming the downtrend. The S&P 500 joined the NASDAQ, NASDAQ 100, Russell 2000 and Philadelphia Semiconductor Index in a Bear market on Friday and reached the 38.2% retracement level and first downside target (3800-3850) for the index. The first downside target for the DJIA remains 29400-29800. The DJIA would qualify for a Bear market at 29440, while 29800 would be a 38.2% retracement of the March 2020 lows to the January 2022 high. The Dow Jones peaked at 29568 in February 2020, so we could be looking at a roundtrip back to the pandemic February high before this is over. Often after a stock or index retraces more than 38.2% the next level of support comes in at the 50% retracement. If that’s the case the next downside target for the S&P 500 would be 3500-3520. The 50% retracement for the NASDAQ is 10400. Secondary indexes the DJ Transportation Index and Philadelphia Semiconductor Index, which typically lead the market higher and lower, both were down more than the major averages this week which is a negative for the market and hints at further weakness. Market technicians will look for positive divergence in these indexes and the small cap Russell 2000 for hints of a market bottom. The different indexes were oversold at the close on Friday by several measures. The percent of stocks on the S&P 500 trading above their 50-day MA was only 19.4% on Thursday’s close, and the bellwether index closed Friday -12.7% below its own 200-day MA. Underlying breadth remains negative but for a second week showed some positive divergence during the week before losing ground again on Friday. The NYSE and NASDAQ Advance/Decline lines continue to show broad distribution in equities, while the number of new 52-week lows have outnumbered the new highs on the NYSE for 18 of the last 19 weeks. New 52-week lows on the NASDAQ have topped the new highs for 26 weeks in a row. Investor sentiment remains at extreme levels and the National Association of Active Investment Managers (NAAIM) Exposure Index fell to 19.5% this week. That is the least amount of exposure to equities by the professionals since March 2020.
There was no place to hide this week as the stock market priced in a recession. Next Thursday Q2 GDP is released and market participants will find out how close we are to a recession or, whether we’re already in one. Q1 GDP was down -1.4% and the definition of a recession is two negative quarters of growth. Unfortunately, a selloff in stocks exacerbates a slow down as investors feel the pinch and spend less. How long does a typical bear market last? We can only look at historical figures but since World War II, the average bear market has taken 13-months to bottom out after hitting a new high, with the average drop 33%. The faster we enter a Bear market however, the shorter the duration. The next FOMC Meeting is scheduled for June 14-15 and the CME Group FedWatch is projecting a 92% probability of a 0.50-point hike followed by another 0.50-point hike at the July 26-27 meeting. That’s likely to keep a lid on relief rallies until we see a relief in rising prices. Next week we could see the major averages attempt to bounce as the week before the Memorial Day holiday is traditionally positive and we’re coming off oversold levels.
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 +1, down six notches 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, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line fell 570 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 682 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 rose to 19.4% vs. 16.7% the previous week, while those above their 200-day moving average increased to 20.5% vs. 19.1%. 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 markets 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 5/18/22 shows outflows of $3.2 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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