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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Stocks Struggle To Start September
September was living up to its billing as the major averages struggled after coming back from the Labor Day weekend. A spike in crude oil prices stirred inflation concerns as OPEC+ extended their production cuts to year-end sending yields higher and equities lower as the week opened. The rise in rates hit home builders and the iShares US Home Construction ETF (ITB) dropped -4.66% before recovering to finish the week down -3.3%. Better-than-expected services data bumped yields higher again mid-week, but investors remained comfortable that the Fed would leave rates unchanged at the September FOMC Meeting. The CME FedWatch Group projects a 93% probability that the Fed leaves rates unchanged. Technology shares were led lower by a decline in Apple (AAPL) during the period after China curbed iPhone usage for government employees leading to a two-day -8% drop in the stock before a late rebound. A dip in Initial Jobless Claims on Thursday supported the Higher for longer’ call on yields and led to a muted session on Friday that finished mixed. The market sectors were mostly lower as Energy (XLE) and Utilities (XLU) gained, while Industrial (XLI), Materials (XLB), Technology (XLK), Healthcare (XLV) and Financial (XLF) were the weakest groups. Although the different indexes went into the weekend on firmer footing, the major averages closed the period lower.
For the period, the DJIA lost 261.12 points (-0.7%) and settled at 34576.59. The S&P 500 gave up 58.28 points (-1.3%) and closed at 4457.49. The NASDAQ dropped 270.28 points (-1.9%) finishing at 13761.53, while the small cap Russell 2000 tumbled 69.29 points (-3.6%) finishing at 1851.54.
Market Outlook: The technical condition of the market deteriorated this week as the major averages fell below a key MA support level during the period. The technical indicators for the major averages slipped into neutral territory, but the small cap Russell 2000 and DJ Transportation Index showed negative divergence with MACD, a short-term trend gauge, bearish and Momentum, as measured by the 14-day RSI, negative and slowing. Most of the different indexes are trading between their respective 50 and 100-day MA with the Russell 2000 having bounced off its 100-day MA. Traders will keep an eye on the 100-day MA as the next test of major support for the indexes, but with the market lacking a catalyst to move higher, we could see stocks struggle or stay range bound until Q3 earnings roll out in October. That was evident on Friday as both the S&P 500 and NASDAQ ran into resistance at their respective 50-day MA. Once again, the secondary indexes, which tend to lead the major averages higher and lower underperformed with the DJ Transportation Index, Russell 2000 and Philadelphia Semiconductor Index all down about -3.5%, which hints at continued weakness in the market. At this stage, only the DJ Transportation Index is oversold with stochastic in the single digits. We may need to see several additional indices get oversold before we can see a meaningful bounce.
Underlying breadth was weak as the NYSE and NASDAQ Advance/Decline lines both lost ground showing most stocks were under distribution. There also was a reversal in the new-highs and new-lows. We saw an expansion in the number of new lows, which had been contracting for the last few weeks, with the number of new lows out numbering the new highs on each day in both the NYSE and NASDAQ. Investor sentiment remains neutral but we’re seeing a divergence in retail and the pros. According to the American Association of Individual Investors (AAII), we saw a jump in retail bulls to 42.2%, up from 33.1% the prior week, and the highest percentage since the first of August. However, the National Association of Active Investment Managers (NAAIM) Exposure Index fell to 49.7 which is about as neutral as you get. The pros seem to be vacillating more than usual, going from 101.8 just six weeks ago, down to 34.4 as August was ending. That compares to an average exposure of 70.2 last quarter.
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 -6, down two notches from the previous week. Cycles A, C and D are bullish, while Cycles B and E are bearish. The CTI is projected to remain in a negative connotation 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 Negative at -6, down six notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 3043 units while the number of new 52-week lows exceeded the number of new highs on all four sessions. Breadth was also negative at the NASDAQ as the A/D line dropped 4909 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 30.6% vs. 44.2% the previous week, while those above their 200-day moving average fell to 45.8% vs. 52.7%. 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 Neutral at +1, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 9/06/23 shows outflows of $5.2 billion.
Market Posture: Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bearish as of the week ending 8/18/2023 (DJIA – 34500.66).
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