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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Stocks Slide On Recession Fears
Stronger than expected economic data signaled the Federal Reserve may have to stay the course longer than expected this week, raising the prospects of a recession. Yields ticked higher and stocks lower as investors mulled wage inflation and better-than-expected factory orders and services data that kept the S&P 500 on a five-session losing streak through midweek. The major averages were able to bounce somewhat on Thursday on hopes that Friday’s November PPI would show inflation beginning to wane, but a hot core-PPI showed wholesale prices rising +0.4% vs. +0.2% expected and the different indexes limped into the weekend. The yield on the 10-year Treasury jumped to 3.57% to close out the week as investors set their attention on the December FOMC Meeting announcement next Wednesday where the Fed is expected to hike rates another 0.50-point. Market participants will be focused on whether Fed Chair Jerome Powell sees yields higher for longer to counter recent economic and jobs strength which threatens a year-end rally. Weakness in equities was across the board with every sector lower. The Energy (XLE) sector was the worst performing group, down -8.45%), as crude oil prices dipped to a new low for the year on uncertainty over China’s reopening and recession fears in the US and Europe. Crude ended the period at $71.47 a barrel after briefly touching $70.19 and was down about -11% for the week. Growth sectors Communication Services (XLC), Consumer Discretionary (XLY), Financial (XLF), Materials (XLB) and Technology (XLK) were the other main contributors to the selloff. The major averages were clinging to support ahead of next week’s FOMC Meeting and turned in their worst weekly performance since September.
For the period, the DJIA fell 953.42 points (-2.8%) and settled at 33476.46. The S&P 500 lost 137.32 points (-3.4%) and closed at 3934.38. The NASDAQ tumbled 456.88 points (-4.0%) finishing at 11004.62, while the small cap Russell 2000 gave up 96.18 points (-5.1%), finishing at 1796.66.
Market Outlook: The technical condition of the market deteriorated this week as the major averages were unable to hold key moving average support levels, closing the period lower. The technical indicators for the different indexes weakened with MACD, a short-term trend gauge, crossing into bearish ground and Momentum, as measured by the 14-day RSI, neutral and slowing. While the DJIA continues to outperform and remains above its 200-day MA and descending trend line off the January-October highs, the blue-chip index did slip back below its August high. Most of the other indexes have either stalled below key resistance levels or broken support.
The S&P 500 rally off the October low stalled just below its descending trend line and the bellwether index was unable to hold support at its 200-day MA but managed to find secondary support at 3930 its 100-day MA during the week. While that could be a floor for a year-end rally, a break below 3930 could induce more selling and send the index to 3840. The NASDAQ failed to penetrate resistance at its 100-day MA but managed to hold support at 10924, its 50-day MA and remains range bound. Negative divergence was seen in the secondary indexes which underperformed the major averages, with the DJ Transportation Index and Russell 2000 both losing more than -5%. Market technicians look to the secondary indexes to lead the market higher and lower. The DJ Transportation Index and small cap Russell 2000 fell below their respective 200-day MA, ending the week with the transports narrowly holding support at its 100-day MA, while the Russell 2000 lost that support and closed near its 50-day MA. The Philadelphia Semiconductor Index has been trading in a narrow range between its 100 and 200-day MA since mid-November but is beginning to show improving positive momentum which could be a positive going forward. Underlying breadth weakened.
The NYSE and NASDAQ were both under distribution this week with the Advance/Decline lines moving sharply lower but accumulative numbers are little changed since mid-October indicating market participants remain undecided whether we’re seeing another rally in a bear market or the start of a new bull market. New 52-week lows outdid the new highs on both exchanges and expanded this week after the NYSE beat the number of new lows over the previous two weeks. Unfortunately, we’re also getting contrasting signals on investor sentiment. While retail investors, according to the American Association of Individual Investors (AAII), remain firmly planted in the Bear camp, Investor’s Intelligence (II) Percentage of Bullish Investment Advisors hit its highest mark since August. However, the National Association of Active Investment Managers (NAAIM) Exposure Index saw equity exposure recede to 55.7% from 65% three weeks ago. Finally, December usually will see positive fund flow into equities due to an influx of money coming in from end of year bonuses and retirement plan contributions. This week Refinitiv Lipper US Fund Flows reported Equity Fund Outflows of -$24.9 billion for the week ending 12/07/22. That is the fourth week of outflows over the last five weeks and shows investors still reluctant to hitch their wagon to the bulls.
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 +8, unchanged from the previous week. Cycles A, B, C and D are bullish, while Cycle E is bearish. The CTI is projected to remain in a positive configuration through December.
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 -5, down three notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 4572 units while the number of new 52-week lows exceeded the number of new high on four of the five sessions. Breadth was also negative at the NASDAQ as the A/D line dropped 5291 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 66.7% vs. 78.3% the previous week, while those above their 200-day moving average dropped to 43.7% vs. 52.0%. 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 12/07/22 shows outflows of $24.9 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 10/21/2022 (DJIA – 31082.6).
Ask Mr. Seifert
Question: Why is it when I buy options on earnings reports and I am right as to the price direction I still lose money?
Answer: That is because the other side of the trade that sold you your options has priced in movement that would not normally be published. If you are trading ABC stock and it has a normal range of +/- 4.00 a week, it is not uncommon for the stock to have its range increased by 50% to 100% just before earnings are released. Over my thirty years of trading options, I have seen hundreds of times when the earnings release is as published, and the stock barely budges. When that happens, all of the options go down in value. It doesn’t matter which ones you own. My advice is that if you want to trade earnings never buy naked options, especially the expiring straddle or strangle. If you want to play this game, you should spread the premium. Either sell vertical or horizontal spreads. You might not hit a home run, but you will hit a lot of singles and doubles and will have very few strike outs.
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