CNBC has revised their Option Action show which is aired every weekday night at 5:30. They have really beefed up the Friday show to the point that we think it is one of the best option oriented shows on the air. Check it out.
Stocks Slammed as Rates Rise
The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
CNBC has revised their Friday Option Action show which is aired weekly at 5:30. The show has been beefed up to the point that we think it is one of the best option oriented shows on the air. Check it out.
Stocks were slammed this week as hopes that inflation had peaked were dashed by a hotter than expected May CPI, China signaling lockdowns could be extended on Covid concerns and fighting in the Russian invasion of Ukraine intensified. The May CPI rose +1% vs. +0.7% expected and +8.6% YoY, the highest since 1981. Core CPI-ex food and energy, rose +0.8% vs. +0.5% consensus. In addition, the University of Michigan Consumer Sentiment Index weighed on stocks falling to 50.2 vs. 58.5, a record low. Investors were cautious all week ahead of Friday’s CPI report though volatility was high. The different indexes opened the period with two days of gains as the yield on the 10-year Treasury slipped below 3% and the Russell 2000 and Philadelphia Semiconductor Index briefly traded above their respective 50-day MA for the first time since April. However, another spike in crude oil prices, above $122 a barrel, coupled with comments from Secretary-Treasurer Janet Yellen that inflation was likely to stay elevated for an extended period despite rising rates sent stocks down on Wednesday. Equities followed European markets sharply lower on Thursday after the ECB said it would halt asset purchases and begin raising rates to battle inflation. Friday’s hot CPI number took the legs out from under the major averages sending the indices down for a third session, as they turned in their worst weekly performance since January. The selloff was across the board with every sector red. The Financial (XLF), Technology (XLK) and REITs (XLRE) sectors sank more than -6%, while Materials (XLB) and Consumer Discretionary (XLY) tumbled more than -5%. Energy (XLE) continued to outperform on strength in oil related stocks but closed out the period red. Yields were higher and the spread between the 2-year and 10-year Treasury tightened which weighed on banking shares. The yield on the 2-year T-Bill landed at 3.069% with the 10-year rate at 3.159%. Market participants now project a 0.50-point hike in rates at the June, July and September FOMC Meetings with some calling for a 0.75-point hike at either June or July. When the dust settled the bears were back in control with the DJIA down 10 of the last 11 weeks, and the S&P 500 and NASDAQ trading lower for the 9th week in 10.
For the period, the DJIA lost 1506.91 points (-4.6%) and settled at 31392.79. The S&P 500 fell 207.68 points (-5.1%) and closed at 3900.86. The NASDAQ dropped 672.71 points (-5.6%) finishing at 11340.02. The small cap Russell 2000 gave up 82.77 points (-4.4%), finishing at 1800.28.
Market Outlook: The technical condition of the market deteriorated as the major averages turned in their worst weekly performance since January. The technical indicators slipped back into negative ground with MACD, a short-term gauge of the trend, crossing into bearish territory and Momentum, as measured by the 14-day RSI, now negative for the different indexes. After trading up to resistance areas the last two weeks, the major averages were turned back and looking for support near the May lows as the period ended. Weakness is across the board and the Communication Services (XLC), Financial (XLF), Healthcare (XLV), Technology (XLK) and REITs (XLRE) sectors all ended the week looking or at new lows for the year. Secondary indexes the DJ Transportation Index and Philadelphia Semiconductor Index led the market lower both losing about -7.5%, a negative going forward. Underlying breadth confirmed the move lower as the NYSE and NASDAQ Advance/Decline lines lost considerable ground showing the majority of stocks were under distribution, while the number of new 52-week lows expanded. Thursday saw a 90% declining share volume day on the NYSE. Investor Sentiment remains overly bearish with the American Association of Individual Investors (AAII) seeing an uptick in retail Bears, jumping to 46.9% from 37.1% last week. Hedge funds were more optimistic as the National Association of Active Investment Managers (NAAIM) Exposure Index jumped to 50% from 34.3% prior.
Hopes for a summer rally were waylaid on Friday and the probability of a recession increased as the Federal Reserve scrambles to catch up with inflation. The higher CPI ensures that the Federal Reserve will have to act more aggressively in hiking rates increasing the chance we’ll see a hard landing for the economy and yields responded. the yield on the 2-year Treasury closed above 3% on Friday for the first time in 10-years. That puts investors back on defense and with the June FOMC Meeting announcement next Wednesday, there’s little chance that we’ll see a bounce in stock prices until we hear from Fed Chair Jerome Powell on monetary policy going forward.
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 Positive at +12, unchanged from the previous week. Cycles A, B, C, D and E are bullish. The CTI is expected to remain positive until August.
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 -1, down seven notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 4404 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 fell 4558 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 dropped to 31.7% vs. 45.4% the previous week, while those above their 200-day moving average fell to 24.2% vs. 30.2%. 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 +5, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 6/08/22 shows inflows of $15 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 6/10/2022 (DJIA – 31392.79).
Ask Mr. Seifert
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