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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Major Averages Finish Mixed Ahead of Tech Earnings
The focus turned from the Fed to earnings this week and despite mixed results, the major averages were able to finish the period mixed in a volatile week of trading. While the NASDAQ opened the week on a seven-day win streak led by a +7.43% jump in Tesla (TSLA) on Tuesday, the Dow Jones struggled after Goldman Sachs (GS) and Travelers (TRV) reported earnings below estimates. Weak December Retail Sales and Industrial Production numbers caught up with the bulls on Wednesday and the market opened lower. Hawkish comments from Fed President James Bullard also contributed as he suggested the Federal Reserve needed to push rates above 5% as quickly as possible sending stocks sharply lower in the afternoon. The Dow dropped 613.89-points (-1.81%), its biggest one-day loss in a month, and rate sensitive sectors were the weakest market groups. A strong jobs report bogged down equities again on Thursday as Initial Jobless Claims fell to their lowest number since last June pushing yields higher again. A better than expected earnings report from Netflix (NFLX) on Friday however, helped the different indexes rebound from losses and strength in big cap tech and the FANG names sent stocks sharply higher. The turnaround was led by gains in the Communication Services (XLC), Technology (XLK) and Energy (XLE) which were able to positive for the week. The broader market was mixed with Industrials (XLI), Utilities (XLU), Consumer Staples (XLP) and Financial (XLF) all down more than -2%. Energy outperformed as crude oil prices nudged higher on expected demand from China’s reopening with crude finishing the week at $81.40 a barrel. Gold prices were also on the rise closing at $1929.40, a nine-month high. Friday ended on a high note, but early losses kept the DJIA and S&P 500 marginally lower for the week, but the NASDAQ was able to post positive for a third consecutive week.
For the period, the DJIA lost 927.12 points (-2.7%) and settled at 33375.49. The S&P 500 fell 26.48 points (-0.7%) and closed at 3972.61. The NASDAQ added 61.27 points (+0.6%) finishing at 11140.43. The small cap Russell 2000 lost 19.70 points (-1.0%) finishing at 1867.33.
Market Outlook: The technical condition of the market was mixed this week as the major averages pulled back from an overbought condition and struggled to hold key moving average support levels before Friday’s spike. The technical indicators finished the period mixed but for the most part were in neutral territory. After leading the different indexes off the October lows, the DJIA ran out of steam this week and slipped back below its 50-day MA and trades below its August and December highs. The Dow Jones has support around 32700-32750 but a break below that level would target 32200, a 38.2% retracement of the October-December rally, and 32300 area where the 100 and 200-day MA’s will provide support. The S&P 500 dropped back below its 200 and 50-day MA this week but did regain those support levels on Friday. The bellwether index ran into resistance at 4,000 which is the descending trend line off the January-December highs. The S&P 500 has strong support at 3800 which represents a 50% retracement of the October-December rally and has been successfully tested several times over the last few weeks. The NASDAQ fell below both its 100 and 50-day MA but like the S&P 500 regained those levels on Friday and remains in its trading range between 10250 and 11500. A positive for the market is that the secondary indexes are showing positive divergence. 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 index experienced a Golden Cross where the 50-day MA crosses above its 200-day MA helping to confirm a positive trend change. The Russell 2000 50-day MA last traded above its 200-day MA a year ago. Market technicians prefer to see the secondary indexes lead the market higher and lower and this at least indicates that the broader market is in a bottoming process. I mentioned last week that the Market Edge/S&P Short Range Oscillator (SRO) showed the stock market was the most overbought it has been since November of 2020 and was due for a pullback. While the SRO served up a short trade for traders, the market remained marginally overbought as the week ended which could lead to more consolidation of recent gains next week. Underlying breadth was mostly positive this week as the NYSE and NASDAQ Advance/Decline lines were almost flat, while the number of new 52-week highs outnumbered the new lows for a third consecutive week. Investor Sentiment remains neutral, but we saw an uptick in the number of bulls in both retail and professional investors. The American Association of Individual Investors (AAII) jumped to its highest percentage of bulls since mid-November after stocks began to rally off the October lows while Investors Intelligence shows the Percentage of Bullish Investment Advisors hit its highest level since a 50% reading in January of 2022! Finally, the National Association of Active Investment Managers (NAAIM) Exposure Index jumped to 65.1 this week, up from only 38.8 exposure to equities just two weeks ago. 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, unchanged 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 Positive at +7, up five notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 585 units while the number of new 52-week highs exceeded the number of new lows on all four sessions. Breadth was mixed at the NASDAQ as the A/D line dropped 484 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 fell to 61.1% vs. 76.6% the previous week, while those above their 200-day moving average eased to 54.1% vs. 58.%. 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, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 1/18/23 shows outflows of $4.1 billion.
Market Posture: Based on the status of the Market Edge market timing models the Market Posture is Neutral as of the week ending 1/13/2023 (DJIA – 34302.61).
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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