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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Summer Rally Stalls On Strong Jobs Reports
The summer rally ran out of gas this week as Fed officials and strong job numbers drove home the case for higher rates, sending stocks lower. The short week struggled to gain traction as weak manufacturing data out of China and new restrictions on exports of AI chips sent stocks lower on Wednesday. Also on Wednesday, details from the FOMC Minutes weighed on the major averages as most Fed officials saw inflation risks to the upside and most see future rate hikes ahead. The committee said the labor market remains tight and several see a mild recession as likely to start later this year. A surprise spike in June payrolls in the ADP Employment Report on Thursday sent yields higher and equities sharply lower as the numbers seemed to guarantee another bump in interest rates at the July FOMC Meeting. A mixed jobs report on Friday kept the Fed on track to raise rates and the CME Group FedWatch priced in an 92.4% probability of a 0.25-point hike. Choppy trading on Friday left the major averages lower for a third consecutive day. The yield on the 10-year Treasury broke above resistance and ended the period at 4.065%, matching its March high, while the rate on the two-year T-Bill briefly crossed above 5% before landing at 4.956%. Crude oil prices scored their biggest weekly gain in three months after Saudi Arabia extended its production cut and oil finished at $73.70 a barrel. Only the REITs (XLRE) sector managed to eke out a gain, while the weakest market groups were Healthcare (XLV), Materials (XLB), Technology (XLK) and Industrial (XLI). For the second time in three weeks the major averages ended the period lower across the board.
For the period, the DJIA lost 672.72 points (-2.0%) and settled at 33734.88. The S&P 500 shed 51.43 points (-1.2%) and closed at 4398.95. The NASDAQ dropped 127.20 points (-0.9%) finishing at 13660.72, while the small cap Russell 2000 gave up 24.07 points (-1.3%) finishing at 1864.66.
Market Outlook: The technical condition of the market deteriorated somewhat this week as the major averages battled higher rates and finished lower. The technical indicators are mixed with MACD, a short-term trend gauge, back to bearish, while Momentum, as measured by the 14-day RSI, neutral to positive, but slowing. The different indexes remain above key moving average support levels with the S&P 500 trading about 10% above its 200-day MA. The bellwether index filled the gap from last Friday’s jump higher and dipped below 4400 at this Friday’s close but has support at 4360. On a negative note, the major averages stalled this week at their mid-June highs which could represent a bearish double top chart pattern for the indexes. Active traders will be watching for a break above those levels to signal if another leg up is about to kick in. The secondary indexes were mixed with the DJ Transportation Index continuing to show positive divergence as it hit a new 52-week high this week, but the small cap Russell 2000 and Philadelphia Semiconductor Index underperformed the broader market. Underlying breadth was weak with the NYSE and NASDAQ Advance/Decline lines losing ground, while new 52-week highs outpaced the new lows on the NYSE, but new lows held the advantage on the NASDAQ. Investor Sentiment is bullish, but the bulls may be getting too complacent. According to the American Association of Individual Investors (AAII), 46.4% of retail investors are bullish which is the highest number in a year. The professionals are also more bullish with the Percentage of Bullish Investment Advisors at 54.9%, its highest number since November 2021. Despite a tick higher in the VIX this week, however, this volatility measure, which is looked at as a trader’s fear gauge, is trading near levels last seen in January 2020 showing investors may be too complacent after this year’s run up in stock prices.
Next week we will get the start of Q2 earnings as the Money Center Banks report. So far, earnings estimates are holding up which means the market could avoid an earnings recession that many analysts have feared. More important will be the release of key inflation data for June. This week’s jobs numbers may have clouded expectations but the early read on wage increases hints that inflation numbers may not have cooled enough to temper a hawkish Fed. Currently the June CPI is forecast to rise +0.4%, up from +0.1% in May, with core-CPI expected to jump +5.1% YoY, down from +5.3% the prior month. Any adjustment higher or lower than estimates is sure to move the market as this week’s stronger than expected ADP jobs report has Wall Street worried about more than just a July rate hike. The US economy has been resilient beyond expectations in the face of soaring yields, but next week will be another brick in the road to either a ‘soft landing’ or a recession.
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 -10, unchanged from the previous week. Cycle D is bullish, while Cycles A, B, C and E are bearish. The CTI is projected to remain in a negative configuration over the short-term.
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, unchanged from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 826 units while the number of new 52-week highs exceeded the number of new lows on three sessions. Breadth was negative at the NASDAQ as the A/D line dropped 1355 units while the number of new lows out did the new highs on two of the four sessions. Finally, the percentage of stocks above their 50-day moving average fell to 57.6% vs. 63.2% the previous week, while those above their 200-day moving average eased to 52.0% vs. 54.8%. 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 Negative at -4, down two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 7/05/23 shows inflows of $6.2 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bearish as of the week ending 5/26/2023 (DJIA – 33093.34).
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Question: When trading the various ‘Traders’ selections, what is a good exit strategy.
Answer: It is recommended that all of the ‘Traders’ selections be closed at or near Friday’s closing prices. However, there are a few exemptions. If a position doubles in price early in the week, it is recommended that the profit be booked and the position closed. This can occur with the Blow Offs, One-Day Wonder and SPY trades. In addition, if a Bullish or Bearish Credit spread drops to $0.05 or less prior to expiration, it is recommended that the trade be closed.
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