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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Rally Heats Up as Inflation Cools
Investors threw caution to the wind this week ahead of key inflation data and the kickoff of Q2 earnings season sending stocks sharply higher. Reversing the previous weeks drop, the major averages charged out of the gate with the DJIA scoring 526.54-points (+1.5%) before Wednesday’s CPI data. Despite cautious words from Fed Chair Jerome Powell, the Consumer Price Index (CPI) came in below estimates slowing to the smallest one-month increase since August 2021. That was followed on Thursday by a soft read in the Producer Price Index (PPI), with the core-PPI up only +0.1% and +2.4% YoY. Investors cheered the data hoping the Federal Reserve would halt its series of rate hikes after the July FOMC Meeting. Yields dropped on the data with the 10-year Treasury rate closing the week at 3.82%, while the two-year T-Bill fell to 4.73%, down from 5% a week ago. The rally in equities was broad-based with every sector posting positive led by strength in growth sectors Consumer Discretionary (XLY), Communication Services (XLC), Technology (XLK), REITs (XLRE) and Materials (XLB), all up more than +2.5%. Crude oil prices nudged higher hitting a 10-week high before closing at $75.31 as the US Dollar continued to weaken. Better-than-expected earnings from the Money Center banks on Friday seemed to lift expectations for Q2 earnings but the bounce faded ahead of the weekend leading to the S&P 500 and NASDAQ snapping a four-day win streak. Despite Friday’s fade, the summer rally looked back on track as the major averages were higher across the board with the S&P 500 and NASDAQ hitting their highest marks since April 2022.
For the period, the DJIA added101.15 points (+0.3%) and settled at 34509.03. The S&P 500 picked up 106.47 points (+2.4%) and closed at 4505.42. The NASDAQ gained 452.98 points (+3.3%) finishing at 14113.70, while the small cap Russell 2000 jumped 66.43 points (+3.6%) finishing at 1931.09.
Market Outlook: The technical condition of the market improved this week as the major averages were able to reverse last week’s dip with the S&P 500 and NASDAQ hitting a 15-month high. The technical indicators are bullish with MACD, a short-term trend gauge, crossing into bullish ground and Momentum, as measured by the 14-day RSI, positive. Several of the indexes, including the S&P 500 and NASDAQ are overbought however, with the RSI moving above 70. The different indexes are overbought by several other measures including the Market Edge/S&P Short Range Oscillator (SRO) which hit +5.74% on Thursday which should lead to more consolidation over the near-term. The secondary indexes, which market technicians prefer to see lead the market higher and lower, continue to outperform with the DJ Transportation Index soaring to its highest level since April 2022 and the Philadelphia Semiconductor Index (SOX) a chip shot from an all-time high. The small cap Russell 2000 outperformed jumping +3.6% on the week. A look at the different market sectors shows Technology (XLK) and Industrial (XLI) at new highs, while growth sectors Communication Services (XLC) and Consumer Discretionary (XLY) traded up to their April 2022 highs. However, despite a strong week, Market Edge rates the sectors mixed. Energy (XLE), Consumer Staples (XLP), Utilities (XLU) and Healthcare (XLV) carry an Avoid opinion, while Financial (XLF) was downgraded to a Neutral from Long this week meaning investors need to remain selective.
Underlying breadth was positive and supportive of higher prices as the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, showed strong accumulation with the NYSE A/D line close to a 52-week high. New 52-week highs outpaced the new lows on the NYSE and NASDAQ with the new highs on the NASDAQ expanding to their highest numbers since November 2021. Investor Sentiment is bullish, but we saw a decrease in the bulls leading up to this week’s inflation data. According to the American Association of Individual Investors (AAII), after reaching a one-year high of 46.4%, the percentage of bullish retail investors fell to 41%. The Percentage of Bullish Investment Advisors slipped back to a neutral 51.4%. One group however, stepped up exposure to equities. The National Association of Active Investment Managers (NAAIM) Exposure Index jumped to 93.3%, its highest holding since November 2021. Sentiment indicators are regarded as contrary signals when they reach extreme levels and investors should note that two of the above readings were last seen when the NASDAQ topped out in November 2021. While they would not be considered a sell signal, with the market overbought it supports the idea that we should see some consolidation in stocks over the near-term. 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, up nine notches from the previous week. Cycle D is bullish, while Cycles A, B, C and E are bearish. The CTI was projected to remain in a negative count for another week or two, but it now looks as though the lows on 6/26/23 could be regarded as where several of the cycles could have been reset to a bullish connotation. However, with mixed readings from several indicators related to the CTI, the posture will upgrade to Neutral for now and wait for confirmation next week. If the intraday low of 33705.68 on the DJIA is not violated, the CTI could reset to a positive reading and remain positive into September.
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 positive at the NYSE as the Advance/Decline line gained 3755 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 3679 units while the number of new highs out did the new lows on each session. Finally, the percentage of stocks above their 50-day moving average jumped to 79.5% vs. 57.6% the previous week, while those above their 200-day moving average increased to 64.6% vs. 52.0%. 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 -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 7/13/23 shows inflows of $1.0 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 7/14/2023 (DJIA 34509.03).
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