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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Tech Stocks Cool Off On Inflation Data
Stocks were able to bounce back on Monday after the previous week’s drop, but a credit rating downgrade of several regional banks and murky inflation data sent yields higher and the major averages finished the period mixed. Moody’s downgrade rattled investors and reignited concerns about the health of the banking system midweek as market participants also looked ahead to key inflation data in consumer and wholesale pricing. An in-line July Consumer Price Index (CPI) with the core-CPI rising +0.2% and +4.7% YoY triggered a relief rally on Thursday, with the DJIA surging 455-points at the open but the gains faded in the afternoon leaving the different indexes with modest gains. The Producer Price Index (PPI) on Friday, however, was slightly hotter than expected and yields ticked higher, while the different indexes traded mixed. The rate on the 10-year Treasury increased to 4.17%, its highest level since November 2022, weighing on big cap technology and growth sectors. The Technology (XLK), Consumer Discretionary (XLY) and Materials (XLB) sectors were the weakest market groups during the week. Crude oil prices rallied on a drawdown in inventory and hit a high mark of $84.40 a barrel before closing at $83.09. Gains in oil related stocks helped boost the Energy (XLE) sector by +3.43% as it approached its February high. Trailing Energy were defensive sectors Healthcare (XLV), REITs (XLRE) and Utilities (XLU). The volatile trading left the DJIA higher for a fourth week over the last five, but the S&P 500 and NASDAQ veered lower for a second straight week. That was the NASDAQ’s first consecutive two-week skid since December.
For the period, the DJIA added 215.78 points (+0.6%) and settled at 35281.40. The S&P 500 fell 13.98 points (-0.3%) and closed at 4464.05. The NASDAQ dropped 264.39 points (-1.9%) finishing at 13644.85, while the small cap Russell 2000 slid 32.35 points (-1.7%) finishing at 1925.11.
Market Outlook: The technical condition of the market deteriorated this week as the S&P 500 and NASDAQ finished lower for a second week. The technical indicators are mostly in negative territory with MACD, a short-term trend gauge, bearish across the board and Momentum, as measured by the 14-day RSI, slowing and sliding into negative ground for the NASDAQ and Philadelphia Semiconductor Index (SOX). While the S&P 500 was able to bounce off support at its 50-day moving average (MA) on Friday, the NASDAQ and SOX fell below that support this week and signals further weakness is probably ahead. A look at different sectors shows Technology (XLK), Consumer Discretionary (XLY), REITs (XLRE) and Utilities (XLU) trading below or at key MA support, with the tech sector down -8% from recent highs on weakness in big cap shares. Offsetting that weakness is strength in Energy (XLE) and Healthcare (XLV), which are near new highs for the year. Financials (XLF), Industrials (XLI) and Materials (XLB) are deteriorating but showing relative strength. The small cap Russell 2000 has pulled back from a bearish double-top chart pattern but has support around 1880-1890. For the S&P 500, traders will keep an eye on the 4400 level for support, which represents the July lows.
For a second week, the underlying breadth was mixed. The tech heavy NASDAQ Advance/Decline line lost ground again with new 52-week lows outpacing the new highs on each day. The NYSE continues to show rotation into cyclical stocks with the Advance/Decline flat, but new highs continue to outnumber the new lows. Investor sentiment has moved closer to the neutral camp as we saw a reduction in bulls across both retail and professionals. After reaching its highest percentage of bulls since November 2021 a few weeks ago, the American Association of Individual Investors (AAII) saw a slide down to 44.7% bullish. That still is above the historical average of 37.5%. The National Association of Active Investment Managers (NAAIM) Exposure Index fell for a second week to 70.2%, down from 101.8% two weeks ago which was the highest exposure to equities since November 2021.
With Q2 earnings almost in the books and Fed officials signaling we’re likely to see higher rates for longer it looks like stocks will once again struggle through August and September. These two months represent the weakest two periods of the year and in the past 50-years, September is the only month that the DJIA, S&P 500 and NASDAQ carry a negative reading. In addition, the bellwether index has only registered a gain 45% of the time. This seasonal pattern isn’t without reason, however. The Stock Trader’s Almanac notes that a major driver of this pattern is that consumers tighten their belts and cut spending after the summer vacation period and back-to-school shopping. Despite this year’s stifling heat, travel company Booking Holdings (BKNG) sees a post-pandemic travel boom with higher ticket prices with no signs of slowing down. That’s obviously been good for travel stocks, but it sounds to me like we could be in for a slower August-September than normal as consumers slam on the brakes. Put all of that together, coupled with the Market Edge Cyclical Trend Index (CTI) rolling over to a negative configuration, and the stock market may be in for another rough stretch. Investors have enjoyed a solid year of gains through July, but it might be time to find some shade and wait for cooler temps. 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 +3, unchanged from the previous week. Cycles B, C and D are bullish, while Cycles A and E are bearish. The CTI is projected to change to a negative connotation next week indicating that we could see additional deterioration in the market through 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 Neutral at -2, down two notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 461 units while the number of new 52-week highs exceeded the number of new lows on all five sessions. Breadth was negative at the NASDAQ as the A/D line dropped 2985 units while the number of new lows out did the new highs on five days. Finally, the percentage of stocks above their 50-day moving average fell to 55.3% vs. 63.4% the previous week, while those above their 200-day moving average eased to 57.1% vs. 59.5%. 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 Negative at -1, up three notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 8/09/23 shows outflows of $8.6 billion.
Market Posture: Based on the status of the Market Edge market timing models, the Market Posture is Bullish as of the week ending 7/21/2023 (DJIA – 35227.69).
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