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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Major Averages Mixed After Fed Rate Hike
Another volatile week saw most of the major averages trade sharply higher after the Federal Reserve slowed the pace of rate hikes, but the DJIA struggled to keep up as earnings from Merck (MRK), Caterpillar (CAT) and Amgen (AMGN) disappointed. Investors were cautious on Monday ahead of Wednesday’s FOMC announcement and the different indexes traded down with the DJIA snapping a six-day win streak. However, a cooler inflation report on Tuesday revived hopes that the Federal Reserve would be less aggressive on rate hikes going forward. A 0.25-point rate hike on Wednesday was followed by a softer tone from Fed chair Jerome Powell that the Committee saw progress in slowing inflation and were getting close to a pause in their tightening cycle. Yields nudged lower and equities higher with the NASDAQ soaring 616.27-points (+5.3%) over a two-day period led by strength in technology and growth assets. A blowout jobs report on Friday however, that saw January payrolls gain 517k vs. 190k expected, gave investors pause and yields inched higher causing the week to end on a sour note. Earnings were mixed with shares of Meta Platforms (META), United Parcel Service (UPS), Align Technologies (ALGN) and Harley-Davidson (HOG) soaring on better than expected results, while Caterpillar (CAT), Amazon (AMZN) and Aflac (AFL) tumbled after disappointing. Growth sectors led the rally with Communication Services (XLC), Technology (XLK), Consumer Discretionary (XLY), Industrials (XLI) and REITs (XLRE) outperforming, while Energy (XLE), Utilities (XLU) and Healthcare (XLV) traded lower. A dip in crude oil prices weighed on the Energy sector as China’s reopening struggles due to rampant covid cases could lead to less demand. Crude futures closed the week at $73.24 a barrel. Friday’s jobs report sent yields back to where they started the week with the rate on the 10-year Treasury closing at 3.54% and the two-year at 4.32% after falling to 4.08% during the week. The S&P 500 closed out a strong January and kicked off February on a two-week win streak, but the DJIA found itself in a trading range and finished lower for the second time in three weeks. The tech heavy NASDAQ finished higher for a fifth consecutive week.
For the period, the DJIA eased 52.07 points (-0.2%) and settled at 33926.01. The S&P 500 added 65.92 points (+1.6%) and closed at 4136.48. The NASDAQ jumped 385.24 points (+3.3%) finishing at 12006.95. The small cap Russell 2000 outperformed and picked up 74.08 points (+3.9%) finishing at 1985.53.
Market Outlook: The technical condition of the market improved this week as the major averages were able to finish higher with the NASDAQ on a five-week win streak. As mentioned last week, with the exception of the S&P 500, the different indexes had broken out of Bullish Double and Triple Top Point & Figure chart patterns. This week the S&P 500 joined the party with a Bullish Triple Top Break Out of its own. The bellwether index also had a bullish Golden Cross where its 50-day MA crossed above its 200-day MA. All positive signals for the market going forward. The technical indicators for the major averages are all in bullish ground with MACD, a trend gauge, positive and Momentum, as measured by the 14-day RSI, strong and moving higher. The different indexes went into the weekend overbought however by several measures. Stochastics were in the 90’s on Friday, 14-day RSI was above 70 on several indexes and the Market Edge/S&P Short Range Oscillator (SRO) hit +7.44% on Thursday which historically has led to a pull back or at least some consolidation in prices. Positive divergence was seen in the outperformance of the secondary indexes with the DJ Transportation Index jumping +7.5% and the Philadelphia Semiconductor Index gaining +4.6%. market technicians like to see these indexes lead the market higher and lower. If there is a negative in the charts, it’s the possible Double-Top formation on the small cap Russell 2000 at 2000. A break above 2000-2005 on the Russell 2000 would be another positive for equities, but traders will watch for failed resistance to signal that a short-term top could be here. Finally, most of the sectors now trade above their respective 200-day MA with growth sectors Communication Services (XLC), Consumer Discretionary (XLY), REITs (XLRE), Technology (XLK) and Materials (XLB) showing strong Relative Strength and outperforming the S&P 500. In addition, the Financial (XLF) sector had a Point & Figure Bullish Double Top Break Out this week and looks to be a market leader going forward. Check out the Market Edge Industry Group analysis for bank stocks that are rated Long or Early Entry Long.
Underlying breadth remains positive as the NYSE and NASDAQ Advance/Decline lines were again higher showing broad accumulation. The NYSE A/D line hit its highest accumulative reading since August. New 52-week highs outnumbered new lows for a fifth consecutive week and are expanding, confirming the move, while volume was above average confirming the move higher. Investor Sentiment remains neutral but we saw an uptick in bullishness across the board. The American Association of Individual Investors (AAII) shows a small uptick in the percentage of bullish retail investors, while the National Association of Active Investment Managers (NAAIM) Exposure Index increased for a fourth consecutive week rising to 78.4%. That is the most exposure to equities for the professionals since April 2022.
Next Sunday is the LVII Super Bowl and if history repeats, it looks like the Philadelphia Eagles already won! I’m referring to the Super Bowl indicator that has a 73% accuracy rate of calling the market. Back in 1978, New York Times sportswriter and economist Leonard Koppett discovered a correlation between the winner of the Super Bowl and how the stock market performs that year. According to the indicator, if the winner of the Super Bowl is a team from the old National Football League or the National Football Conference (NFC), the bulls will reign on Wall Street, while if a team from the old American Football League or American Football Conference wins, the bears will rule and the market will be down for the year. The exceptions are the Indianapolis Colts , Pittsburgh Steelers and the Baltimore Ravens (originally the Cleveland Browns) who played in the old NFL but are now in the American Football Conference (AFC). If any of these teams win it counts as a win for the NFC. Although the indicator has been spotty the last few years, it still has an impressive track record. Unfortunately, as Chief Investment Strategist of US Equities at CFRA, Sam Stovall points out, the Super Bowl theory has high correlation and no causation. Making investment decisions based on a football game is a little counter intuitive to a solid, diversified portfolio strategy, but it makes the game a bit more exciting.
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 -3, unchanged from the previous week. Cycles C and D are bullish, while Cycles A, 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 +8, down two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 2291 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 gained 3332 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 increased to 82.3% vs. 77.3% the previous week, while those above their 200-day moving average jumped to 74.5% vs. 63.5%. 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 a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 2/01/23 shows inflows of $637 million.
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
What is the VIX Index and how is it calculated?
VIX is the ticker symbol for the CBOE’s volatility index. It shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. It is a widely used measure of market risk and is also referred to as the “investor Fear Gauge”.
The CBOE designed the VIX to create various volatility products. VIX was the first successful attempt at creating and implementing such an index. Introduced in 1993, it was originally a weighted measure of the implied volatility of eight S&P 100 at-the-money put and call options. Ten years later, in 2004, it was expanded to use options based on a broader index, the S&P 500, which allows for a more accurate view of investors’ expectations of future market volatility. VIX values greater than 30 are generally associated with a large amount of volatility because of investor fear or uncertainty, while values below 20 generally correspond to less stressful, even complacent times in the markets.
VIX is a computed index, much like the S&P 500 itself, although it is not derived based on stock prices. Instead, it uses the price of options on the S&P 500, and then estimates how volatile those options will be between the current date and the option’s expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility, which the index tracks. While there is not a way to directly trade the VIX, the CBOE does offer VIX options, which have a value based on VIX futures and not the VIX itself. Additionally, there are 24 other volatility exchange-traded products (ETPs) for the VIX, bringing the total number to 25.
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