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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Wall Street Rallies on Jobs Data
Following a dismal end to 2022, stocks began the New Year locked in a tight trading range before the December jobs report on Friday, sparked an across-the-board rally that left the major averages with modest gains for the week. Prior to Friday’s surge, stocks saw a lot of volatility as economic indicators came in mixed while stocks posted little change. But the buyers came off the sidelines on Friday as equities opened sharply higher which led to a broad-based rally as cooling wages and moderation in U.S. job growth in December calmed investors’ anxiety over the Fed’s rate hike trajectory. The DJIA broke out above its 50-day MA, while the S&P 500 broke out above its 100-day MA but settled just short of its 50-day MA. The beaten-up NASDAQ still has a lot of work to do and continues to trade below its 50-day MA. Bonds were flat as the benchmark 10-year note dropped 7 basis-points to close around 3.70%, while the 2-year yield was down about 4 basis points to 4.37% while the US Dollar (UUP) continues to fall, giving a boost to commodities. On Thursday, the major indexes gave back all of Wednesday’s gains following strong labor data and hawkish comments from a Fed official. The ADP Employment report showed private employment rose by 235K vs. 150K while the Labor Department reported filings for unemployment insurance fell to 204K from the prior week’s reading of 223K, the lowest since September 2022.
Fueled by sizable job cuts from Amazon (AMZN) and Salesforce (CRM), there was continued selling in the big cap technology names for most of the week. Crude oil prices ended lower after starting out the New Year around $80 a barrel. Communications Services (XLC), Materials (XLB) and Financials (XLF) led the market sectors higher during the week, while Health Care (XLV) and Energy (XLE) underperformed.
For the period, the DJIA gained 483.36 points (+1.5%) and settled at 33630.61. The S&P 500 was higher by 55.58 points (+1.4%) and closed at 3895.08. The NASDAQ surged by 102.81 points (+1.0%) finishing at 10569.29, while the small cap Russell 2000 picked up 31.55 points (+1.8%) finishing at 1792.80.
Market Outlook: The technical condition of the market remains mixed as most of the major averages finished the period higher. The technical indicators for the different indexes are in neutral territory with MACD, a short-term trend gauge, bearish but Momentum, as measured by the 14-day RSI, is improving. The DJIA was able to break above resistance at its 50-day MA this week and continued to edge higher above the descending trend line off the January-October decline. The S&P 500 managed to hold support around 3800 this week but remains below both its 200 and 50-day MA. Despite Friday’s rally, the NASDAQ remains below its 50-day MA as it continues to trade in a range between 10200 and 11400 which has been in place since September. All three of the previous short-term NASDAQ rallies since last November have been turned back at its 100-day MA. The secondary indexes were also trading in a close range before Friday’s surge led to the DJ Transportation index breaking out above its 100-day MA and testing resistance at its 50-day MA while the Russell 2000 index moved closer to that key resistance level. More positive divergence could be seen with Philadelphia Semiconductor Index breaking out above both its 50 and 100-day moving averages.
Underlying breadth was mixed with the NYSE and NASDAQ Advance/Decline lines advancing, which is a sign of some positive divergence. New 52-week highs outdid the new lows on both exchanges as investors scooped up oversold bargains. Investor sentiment improved a bit but remains bearish. The American Association of Individual Investors (AAII) survey saw a decline in retail investors to 20.5% from 26.5% a week ago, while The National Association of Active Investment Managers (NAAIM) Exposure Index saw a move down to 39.79% equity exposure from 43.48% the previous week.
Investors will look to whether upcoming earnings will be able to further slowdown the economy to be consistent with a 2% inflation target. Economists believe wage growth would have to slow much further for inflation to fall all the way back to its intended target. The Fed is likely to be skeptical with an unemployment rate still near historic lows at 3.5%. However, economists caution that no single report makes a trend, and that despite the progress in December, the Fed has much further to go given how the labor market continues to remain robust. 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 five notches from the previous week. Cycles A, B and E are bearish, while Cycles C and D are bullish. The CTI is projected to go to a negative configuration in January.
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 Neutral at -2, down two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 3922 units while the number of new 52-week highs out did the new lows on each session. Breadth was positive at the NASDAQ as the A/D line gained 3675 units while the number of new highs beat the new lows on all four days. Finally, the percentage of stocks above their 50-day moving average rose to 58.9% vs. 46.4% the previous week, while those above their 200-day moving average jumped to 47.6% vs. 39.1%. 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 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 1/04/22 shows outflows of -$16.2 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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