Stocks Slide After Fed Rate Hike
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The following is an excerpt from this week’s ‘Weekly Market Letter’ from Market Edge (www.marketedge.com).
Rates were on the rise and stocks took a dive this week as the Federal Reserve hiked rates 0.75-point, the biggest bump since 1994, in its effort to bring down inflation. Investors sold stocks across the board on Monday as recession fears grew and every sector finished in the red. The rate on the two-year T-Bill increased to 2.358%, its highest mark since 2007, and briefly inverted with the 10-year Treasury. The DJIA dropped more than 1,000 points before settling with a loss of 876.05 points (-2.79%) and the S&P 500 closed in Bear market territory. The stock market staged a relief rally on Wednesday after the Federal Reserve stepped up and raised rates at the June FOMC Meeting promising a more aggressive stance to battle inflation with at least another 0.50-point hike in July on the table. An oversold S&P 500 snapped a five-day losing streak, led by gains in the Consumer Discretionary and Technology sectors. Dismal housing and manufacturing data, coupled with Central Banks from England and Switzerland raising rates on Thursday however, erased Wednesday’s spurt and the different indexes put in new 52-week lows ahead of the long weekend. Slowing growth weighed on crude oil prices, which saw smaller drawdowns in stockpiles for a second straight week, and oil closed at $109.85 a barrel. That sent the Energy (XLE) sector sharply lower ending the period down -17.15% and 22% off a recent high. Crypto currency Bitcoin was another victim of the week’s selloff as it dropped about 30%. Every sector finished the week lower with Energy the weakest group followed by Utilities (XLU), Materials (XLB), Consumer Discretionary (XLY) and Industrials (XLI), all down at least -6%. Despite a mixed finished on Friday, the major averages closed the week with their biggest percentage loss since March 2020. The DJIA was lower for the 11th time in 12 weeks, while the S&P 500 and NASDAQ tumbled for a 10th week out of 11.
For the period, the DJIA lost 1504.21 points (-4.8%) and settled at 29888.78. The S&P 500 fell 226.02 points (-5.8%) and closed at 3674.84. The NASDAQ dropped 541.67 points (-4.8%) finishing at 10798.35. The small cap Russell 2000 gave up 134.59 points (-7.5%), finishing at 1665.69.
Market Outlook: The technical condition of the market deteriorated as the major averages extended their losses and hit new 52-week lows. The technical indicators are in negative ground but very oversold. Stochastics dropped into single digits for the different indexes and the Market Edge/S&P Short Range Oscillator (SRO) ended the week at -9.37%. Furthermore, only 12.4% of stocks are trading above their 200-day moving average. Those oversold levels should set the market up for a bounce next week as investors begin bargain hunting. Momentum and trend readings remain bearish, and the VIX, which measures how worried traders are, is stubbornly staying in the low 30’s on big down days, which points to the potential for more downside. Finally, secondary indexes the Russell 2000 and Philadelphia Semiconductor Index, which tend to lead the market higher and lower, continue to fall more than the broader market which hints that a bottom is not in. 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 registered more than 1,000 issues on both the NYSE and NASDAQ during the period. Investor Sentiment remains overly negative and both retail and institutional investor indicators showed increased bearishness this week.
The S&P 500 made it official this week, falling into Bear market territory, but there may be more pain on the horizon. While investors should know not to fight the Fed, the next shoe to fall may be corporate earnings. This week FactSet Research trimmed Q2 earnings growth for the S&P 500 from +5.9% in March, to +4.0%. That would be the lowest growth rate for the bellwether index since Q4 2020. However, that number is likely to move lower as we see more companies issue guidance over the coming weeks. Of the companies so far issuing guidance, 77 have cut earnings estimates while only 31 have raised estimates. This week’s selloff has left the S&P 500 trading at a P/E of about 15, which is below the 5-year average P/E of 18.6, however, if earnings continue to trend lower, the P/E will rise. The major averages are oversold and certainly overdue for an extended relief rally, but this bear still looks hungry. I intend to keep some powder dry.
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 +1. The CTI was reset the week ending 5/27, but a new low was made by the DJIA the week ending 6/10 which aborted that reset. The CTI will reset next Friday if the DJIA is able to hold above this week’s intraday low of 29653.29.
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 -7, down six notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 4373 units while the number of new 52-week lows exceeded the number of new highs on all five sessions. Breadth was also negative at the NASDAQ as the A/D line fell 3766 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 12.5% vs. 31.7% the previous week, while those above their 200-day moving average fell to 12.4% vs. 24.2%. 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 +7, up two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 6/15/22 shows outflows of $16.2 billion. That is the largest outflow since June 2020.
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).
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