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Major Averages Gain For Second Week
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Investors shook off tough talk on rates from Fed officials to start the week and bid stocks higher as inflation data showed signs of easing. Yields ticked lower and equities higher and despite mixed earnings from the Money Center Banks on Friday the NASDAQ closed the period on a five-day win streak. Market participants were optimistic ahead of Thursday’s CPI report that showed prices recede for a sixth consecutive month and the different indexes jumped on the report. The December CPI fell -0.1% from the prior month and was up +6.5% YoY after peaking at +9.1% in June. That gave the Federal Reserve room to trim the pace of rate hikes with the CME Group FedWatch projecting a 95% probability of only a 0.25-point bump at the February 1, FOMC Meeting and a pause at the March meeting. The rate on the 10-year Treasury ended at 3.49% on Friday, while the two-year T-Bill closed the week at 4.21%, down from 4.29% on Monday. Leading the market advance this week was Consumer Discretionary (XLY), Technology (XLK), REITs (XLRE), Materials (XLB) and Communication Services (XLC) all up about 4%. Consumer Staples (XLP) and Healthcare (XLV) were the only sectors that finished lower. The US Dollar was weaker, falling to its lowest mark since June giving a boost to emerging markets and commodities. Copper spiked more than +13% for the period and crude oil +9.0% despite a bigger than expected rise in inventory on expectations of demand from China’s reopening. Travel stocks were strong with the Market Edge Airlines Industry Group soaring more than +13%. Alternative Energy stocks were also sharply higher after Congress passed its Spending Bill allocating $3.46 billion toward clean energy. With Q4 earnings finally underway, the stock market still looks relatively expensive which could lead to some back and forth trading over the near term, but the major averages were able to start 2023 on a two-week win streak.
For the period, the DJIA gained 672.00 points (+2.0%) and settled at 34302.61. The S&P 500 was higher by 104.01 points (+2.7%) and closed at 3999.09. The NASDAQ surged 509.87 points (+4.8%) finishing at 11079.16, while the small cap Russell 2000 picked up 94.23 points (+5.3%) finishing at 1887.03.
Market Outlook: The technical condition of the market improved this week as the major averages advanced for a second week. The technical indicators are bullish with MACD, a short-term trend gauge, and Momentum, as measured by the 14-day RSI, in positive ground and rising. The DJIA continues to be the leader of the major averages and trades above key moving average (MA) resistance levels and is above its descending trend line off the January to December highs. The S&P 500 managed to close above its 200-day MA on Friday and remains just below its descending trend line around 4,000. A break above 4,000 could trigger a fresh leg up. It has resistance at 4100, the November and December high for the bellwether index. Formidable support remains at 3800.
The NASDAQ finally made it back above its 50-day MA and cleared resistance at its 100-day MA for the first time since September, but remains in a trading range between 10200 and 11400 that’s been in place since September. Positive divergence is seen in the outperformance of the secondary indexes which bodes well for the market going forward. The DJ transportation Index, Russell 2000 and Philadelphia Semiconductor Index are all trading above their respective 200-day MA. In addition, the transports and small cap indexes are in the process of a golden cross where the 50-day MA crosses above its 200-day MA helping to confirm a trend change, another win for the bulls.
Despite bullish under currents, the stock market finished the period very overbought with the Market Edge/S&P Short Range Oscillator (SRO) hitting 9.46% on Thursday. That’s the most overbought the market has been since November 2020. Historically, when the SRO moves above 7%, equities pulled back as institutional investors have taken profits which hints that the major averages need to consolidate their recent gains before a new leg can begin. Underlying breadth was strong this week with the NYSE and NASDAQ Advance/Decline lines hitting their highest totals since September. In addition, both exchanges posted more new 52-week highs than lows last week for the first time since mid-August showing broad accumulation and new leadership. Finally, Investor Sentiment has returned to a neutral position after months of traders being overly bearish. While retail still remains cautious with bears outnumbering bulls 2:1, the Percentage of Bullish Investment Advisors reached 41.4% this week and the National Association of Active Investment Advisors (NAAIM) Exposure Index is at its highest level in four weeks.
Most analysts expected stocks to weaken again to start the year but the market has surprised to the upside as inflation numbers came in softer than expected. However, the market still faces headwinds including reduced earnings and an inverted yield-curve that suggests a recession is on the horizon. What type of strategy will take the lead this year? Growth or Value? If you’re looking for investment ideas that have the potential to outperform in 2023 look no further than a time tested strategy of investing in the Dogs of the Dow. This investment style simply finds the top 10 dividend yielding stocks in the Dow Jones Industrial Average and equally allocates the stocks into a portfolio. A $100,000 investment would be divided equally with $10,000 going into each stock. At the end of the year you can rebalance the portfolio by selling the stocks that are no longer a top dividend play and scale back on positions that have gains to reach 10% again. The premise is that you are buying good companies with solid balance sheets that have temporarily gone out of favor. Although history may not repeat itself, this simple, widely followed strategy has beaten the DJIA eight of the last 10 years and in 2022 was down only -1.5% to the Dow’s -6% and the S&P 500’s -19.6% drop. As of 1/12/23 this diversified portfolio would include Verizon (VZ – 6.24%), Dow (DOW – 4.78%), Intel (INTC – 4.82%), Walgreens (WBA – 5.24%), 3M (MMM – 4.61%), International Business Machines (IBM – 4.53%), Amgen (AMGN – 3.14%), Cisco Systems (CSCO – 3.10%), Chevron (CVX – 3.21%) and JP Morgan Chase (JPM – 2.87%). As a bonus, every stock except Chevron is currently rated a LONG by Market Edge.
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 -1, down two notches from the previous week. Cycles A, C and D are bullish, while Cycles B and E are bearish. The CTI is projected to remain in a negative configuration through February.
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, up four notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 6128 units while the number of new 52-week highs exceeded the number of new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line added 7851 units while the number of new highs out did the new lows on each day. Finally, the percentage of stocks above their 50-day moving average jumped to 76.6% vs. 58.9% the previous week, while those above their 200-day moving average rose to 58.5% vs. 47.6%. 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 Neutral at +1, down two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 1/11/22 shows outflows of $1.2 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 1/13/2022 (DJIA – 34244.11).
Ask Mr. Seifert
Question: Why Is Market Psychology So Important To The Success Of A Trader?
Answer: Without a doubt the most important aspect of trading or investing isn’t numbers. Everyone has numbers. It is your emotional view of the market that is the key. For over 40 years I have taught scores of people how to trade and the one common trait that all successful traders and investors have is that they understand how the market works. It has never ceased to amaze me how little traders comprehend when I ask them how a trade takes place. How can you expect to beat the New England Patriots if you don’t know what defense they are in? It is incredible that most traders believe that when the market is rallying it is because there are more “buyers than sellers”. They listen to the media and that is what they tell them is going on during a rally. When the market is breaking, they are told there are more “sellers than buyers”. So here is my first lesson on market psychology. The market is an auction where buyers and sellers bid and offer for a security or option. For every buyer there must be a seller. When they agree to exchange wealth, it is called “price discovery”. The market is in equilibrium, even if it is only for a few seconds. So how does the market rally if the number of buyers and sellers are the same? The buyers are willing to pay more to get in. When they can’t find any sellers at the price they want, they must “bid the market higher”, until they find where the sellers will exchange wealth.
The second principal that a trader must learn after they understand that the market is an auction is that there is no silver bullet that prints money. Trading is a probability game and as such, wild things are going to happen. Let’s say that you follow Market Edge which has had a phenomenally accurate prediction record for the past 25 years. Even if it picks 70% winners, you are still going to have losing periods where nothing goes right. If you quit trading every time that it hits a slump, you will be around for the losers but will miss out on the winners. When you trade or invest you must be willing to accept the inevitable drawdowns that are part of the business. Even Warren Buffett takes beatings from time to time and if he quit every time things went sour, you wouldn’t know his name!
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