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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Wall Street Wobbles on Banking Woes
A wild week on Wall Street ended with the major averages mixed as banking jitters fueled more recession fears and big cap technology became the safety trade. As expected, equities nose-dived on Monday’s open after the collapse of SVB Financial (SIVB) the previous Friday. A run on deposits at other western regional banks including First Republic (FRC), and PacWest (PACW) sent financial shares plummeting before a last hour bounce. Stocks were on the rebound Tuesday after February CPI showed a cooling in prices which pushed yields lower. The major averages got another boost after the government stepped in to back deposits at several banks. The relief rally was short-lived however, as banking jitters spread to Europe with liquidity problems spreading to Credit Suisse. Despite weakness in the broader market, the NASDAQ was on a positive four-day run going into Friday as investors rotated into big cap technology and semiconductor shares including Microsoft (MSFT), Meta Platforms (META), Apple Co (AAPL) and Nvidia (NVDA). News that several Money Center banks would deposit funds into troubled regional banks to shore up reserves and a bailout of Credit Suisse by the Swiss government checked another selloff on Thursday’s open sending the different indexes sharply higher, again led by strength in tech with the Philadelphia Semiconductor Index surging +4.05%. Finally, turbulence in the banking sector led to another steep selloff in Friday’s session as market participants remained wary of more fallout over the weekend. While the focus was on the banking industry, crude oil prices fell to their lowest level since November 2021 on fears of an economic slowdown and weaker demand from China in its reopening than expected. Crude prices fell about -14% and settled at $66.28 a barrel. Yields were lower ahead of next week’s FOMC Meeting where the Federal Reserve is still expected to hike rates a 0.25-point with short-term yields feeling the crunch. The rate on the two-year Treasury settled at 3.83% after touching 5.09% barely a week ago. The 10-year T-Bill closed with a yield of 3.41%. The market sectors saw a wide split with growth and defensive moving higher, while cyclical sectors slipped lower. Technology (XLK), Communication Services (XLC) and Utilities (XLU) were the strongest market groups, while Energy (XLE), Financials (XLF) and Materials (XLB) closed sharply lower. Despite the tumble into the weekend, the S&P 500 and NASDAQ were able to close the week in the plus column, while the DJIA finished in the red for the sixth time in seven weeks.
For the period, the DJIA lost 47.66 points (-0.1%) and settled at 31861.98. The S&P 500 added 55.05 points (+1.4%) and closed at 3916.64. The NASDAQ jumped 491.62 points (+4.4%) finishing at 11630.51, while the small cap Russell 2000 slipped 46.81 points (-2.6%) finishing at 1725.89.
Market Outlook: The technical condition of the market was mixed this week as there was positive divergence from the NASDAQ and S&P 500, while most of the other indexes drifted lower. After hitting our initial target of 31750, which represented a 50% retracement of the October -January rally, the DJIA continued lower with 31450-31500 now a possible floor followed by 31,000. The technical indicators for the Dow Jones remain in negative ground with the trend, as measured by the MACD, bearish. The DJIA is also below its 200-day MA. The S&P 500 tried and failed to reclaim its 200-day MA and closed the period with its technical indicators in negative ground. The bellwether index remains above its December low, a positive, and 3750 a target representing a 50% retracement of the October-February rally would be its next support. The NASDAQ came close to our 10920 target and bounced on a rotation into tech, finishing higher. The technical indicators are in neutral territory but Momentum, as measured by the 14-day RSI, has improved and is moving higher. The secondary indexes, which tend to lead the broader market higher and lower, are also giving mixed signals. The small cap Russell 2000 and the DJ Transportation Index were two of the weakest performers this week, down more than -2.5%. In addition, the Russell 2000 has broken below its December low and with the DJIA, is negative for the year. The Philadelphia Semiconductor Index however, is showing positive divergence and relative strength jumping +5.5% this week with MACD and Momentum positive and improving. The mixed signals hint that the different indexes could be locked in a trading range ahead of the FOMC Meeting. That’s assuming more surprises in the banking industry aren’t uncovered over the weekend.
Underlying breadth was negative despite the mixed finish. The NYSE and NASDAQ Advance/Decline lines both lost ground, but the falloff was marginal. New 52-week lows outnumbered the new highs throughout the week but peaked on Monday reaching numbers not seen since mid-October. Investor Sentiment became more bearish after last week’s banking problems came to light. Retail bulls, according to the American Association of Individual Investors (AAII) fell to their lowest percentage (19.2%) since last September. Last week’s debacle also scared the pros. The National Association of Active Investment Managers (NAAIM) Exposure Index dropped to 41.9%. That’s the lowest exposure to equities for this group since January and down from 81.4% just four-weeks ago.
Next week we get the Fed’s decision on yields to fight inflation and it may surprise some that a 0.25-point hike still looks to be in the cards. Over the last few days we’ve seen the CME Group FedWatch pencil in anywhere from a 0.50-point hike to a pause, with rate cuts appearing as early as September. While a pause would be the most prudent action, the Fed will raise rates a 0.25-point so as not to lose credibility and avoid looking like they were blind-sided by the weight soaring yields put on the banking system. I expect more volatility around the Fed’s decision, but the reality is a small increase and dovish guidance is unlikely to rattle the market, while still targeting inflation as one of the Federal Reserve’s main mandates. At this stage, investors might be more worried about a coming recession signaled by the yield curve inversion and sinking oil prices that point to slowing demand. 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 return to a bullish configuration soon but another lower low for the DJIA was made this week. The CTI could shift to bullish position next week if the DJIA can remain above 31497.
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 a notch from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 2033 units while the number of new 52-week lows exceeded the number of new highs on all five sessions. Breadth was also negative at the NASDAQ as the A/D line dropped 2368 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 fell to 24.2% vs. 31.1% the previous week, while those above their 200-day moving average slipped to 41.4% vs. 46.9%. 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, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 3/15/23 shows outflows of $17.7 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
What is a collar and how does it protect my portfolio?
A collar can be used in many ways. It is used to avoid paying taxes in this period for a stock position that has a large profit. It can also be used for any purpose where you want to keep the stock and have no market risk. The collar is put in place by selling a call above the current market price of the stock and buying a put below the price. As an example, let’s assume that you own 100 shares of TSLA that you bought last year at $150. The stock is now trading at $300 but you don’t want to sell it. To put the collar in place, you would sell the $305 call and buy the $295 put. They both will have the same amount of premium so whatever you lose in the call you make in the put and vice versa. You have collared the stock and locked in its value at $300. When you want the stock to trade freely again you can either let the options expire if they are both out of the money or you can buy back the collar if one or the other is in the money. In either case you have protected your investment for the time period of the option serial that you selected.
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