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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Investors Bid Adieu to 2022
Santa was a no show this week as yields crept higher sending stocks lower as the stock market closed out its worst year since 2008, and the fourth worst year since 1945. The major averages were hit with tax selling after coming back from the long holiday weekend sending the NASDAQ down to its lowest close since October on Wednesday as semiconductors and big cap technology shares bore the brunt of a two-day selloff. The DJIA and S&P 500 also struggled with every sector in the red, led down by losses in Communication Services (XLC), Consumer Discretionary (XLY) and Technology (XLK). The major averages were able to bounce back on Thursday as investors stepped in and picked up beaten down stocks after the jobs report showed an increase in Initial Jobless Claims, but the different indexes rolled over again on Friday. The market sectors finished mixed with Financials (XLF), Energy (XLE) and Communication Services (XLC) posting small gains, while every other sector finished the period lower led down by rate sensitive groups Consumer Staples (XLP), Utilities (XLU) and REITs (XLRE). Materials (XLB) was the worst performing sector. Crude oil prices struggled during the week before pushing back $80 a barrel at the close on Friday. Yields nudged higher throughout the week with the rate on the 10-year T-Bill landing at 3.88%, a seven-week high, and the two-year Treasury closing the year at 4.42%. Investors bid adieu to 2022 and hoped to put a dismal year behind them as the S&P 500 and NASDAQ limped out of the year on a four-week losing streak and the DJIA down for the third time over the last four weeks.
For the period, the DJIA lost 56.68 points (-0.2%) and settled at 33147.25. The S&P 500 eased 5.32 points (-0.1%) and closed at 3839.50. The NASDAQ gave up 31.38 points (-0.3%) finishing at 10466.48, while the small cap Russell 2000 picked up 0.32 point (+0.0%) finishing at 1761.25.
Market Outlook: The technical condition of the market remains weak as the major averages finished the period lower. The technical indicators for the different indexes are in negative territory with MACD, a short-term trend gauge, bearish and Momentum, as measured by the 14-day RSI, negative and slowing. The DJIA was unable to hold support at its 50-day MA this week and continues to struggle just below its descending trend line off the highs of the January-October selloff and below its August high. If the blue-chip index can’t hold the current level next support is 32200-32450. The S&P 500 is trading below its 200, 100 and 50-day MA and briefly broke support at 3800 on Wednesday before closing the week back above it. A break below that level would open the door to a move down to 3700-3720 over the near-term followed by support at 3570. The NASDAQ is below its 50-day MA and remains in a range between 10200 and 11400 that has been in place since September. The NASDAQ traded down to the bottom of that range on Wednesday hitting 10207 before bouncing back which hints that a near-term bottom could be in place. A break below 10200 would lead to a retest of the October low at 10080. As mentioned last week, the secondary indexes aren’t providing any support or positive divergence suggesting more weakness in January. However, the DJ Transportation Index and Philadelphia Semiconductor Index found support at their 50% retracement level of the October-December rally, a small win for the bulls. The small cap Russell 2000 has retraced more than 50% of the October-December rally and could have 1675 in its sight, another -4.5-5% downside.
Underlying breadth remains weak, but the NYSE and NASDAQ Advance/Decline lines are little changed over the past two weeks which is a sign of some positive divergence. This suggests that investors aren’t throwing the baby out with the bathwater and are buying stocks on dips, a positive going forward. New 52-week lows outdid the new highs on both exchanges but contracted somewhat, also suggesting investors are looking for oversold bargains. Investor sentiment improved a bit but remains bearish. The American Association of Individual Investors (AAII) survey saw an uptick in retail investors to 26.5% from 20.3% a week ago, while The National Association of Active Investment Managers (NAAIM) Exposure Index saw a move up to 43.5% equity exposure from 39.4% the previous week.
After a miserable 2022 for stocks, investors are still facing a Fed that promises higher rates for longer, a possible recession on the horizon, and earnings estimates that continue to inch lower as we move into 2023. Hard for investors to get excited about the stock market with all that going on! However, there are signs that market gurus could be just as wrong about the coming year’s collapse as they were about last year’s possibilities. For one, over the last 50 years, the S&P 500 has only been down two-years in a row twice! In addition, Chief Market Strategist, Ryan Detrick of LPL noted recently that following a negative midterm election year, which we’ve just endured, the S&P 500 finished the following year higher on all eight occurrences, with an average yearly return of +24.6%. Warren Buffett once said, be fearful when others are greedy, and greedy when others are fearful. While stocks are likely to struggle in January and investors may want to stay in cash, don’t let the Bears keep you out of the market. If history repeats itself, 2023 should belong 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 +6, unchanged from the previous week. Cycles B, C and D are bullish, while Cycles A and E are 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 -4, unchanged from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 308 units while the number of new 52-week lows exceeded the number of new high on all four sessions. Breadth was also negative at the NASDAQ as the A/D line dropped 189 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 46.4% vs. 66.4% the previous week, while those above their 200-day moving average fell to 39.1% vs. 44.9%. 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, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 12/28/22 shows inflows of $1 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: My advisor says to buy debit spreads since they have less risk than a credit spread. Is he right?
Answer: Your broker is referring to the fact that a debit spread will always have less premium risk than a credit spread. However, that doesn’t mean that it has less risk. In fact, it has more risk than a credit spread with the same strike. Here is why. For the debit spread to be profitable it must overcome the premium you paid plus it must move in the price direction that you predicted when you bought it. Even if you are correct in predicting the price movement, it may not move enough to overcome the debit. In short, you have to be right and right. On the other hand, a credit spread can win three ways. The price moves in the direction you predicted, the price doesn’t move at all, or the price moves against you but not as much as the credit you sold. For my money, I would rather have three ways to win and take the larger premium risk. In the long run you can’t beat a credit spread.
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