Mr. Seifert Sez – 10-28-18

The technical condition of the market continued to deteriorate with the Momentum Index slipping further into negative territory. The markets technical indicators are all in bearish ground with no signs of positive divergence and little evidence that a bottom is in. Although the different indexes are oversold, further downside still looks likely. The major averages broke below the 61.8% Fibonacci retracement level of the move from the February lows to the recent highs and that opens the door for a complete retracement of that move. The DJ Transportation Index, Russell 2000 and Philadelphia Semiconductor Index, which tend to lead the market have already retraced that move. In addition, internal breadth remains weak. The NYSE and NASDAQ Advance/Decline lines, regarded as leading indicators of market direction, continue to move lower and the number of new 52-week lows have expanded and are at numbers last seen in the market selloff of January-February 2016. As I mentioned in Wednesday’s daily comment, we still haven’t seen panic selling despite the major averages falling into correction territory. VIX, which measures the fear in traders, has been topping out around 25 and a spike in the VIX above 30 would be needed, at least, to signal that we could get a more meaningful relief rally.

It’s doubtful that the market will stage a meaningful rally ahead of mid-term elections but investors can be preparing a list of stocks to buy, though I would expect big intraday swings both up and down. In a rising rate environment the market needs to trade at a lower P/E and the S&P 500 is currently trading around 15.2x forward earnings. That’s just above the 10-year average of 14.5 which would represent a good entry point. After hitting our downside targets over the last week our new targets for the major averages are 23600-24000 for the DJIA, 2575-2600 for the S&P 500 and 6850 for the NASDAQ. The Russell 2000 hit our target of 1640 this week for a 14% correction and investors could begin to buy small cap tech and healthcare names at that level. The Philadelphia Semiconductor Index has exceeded our downside target and could represent a decent level to pick up cheap shares. Lastly, investors should be on alert for a ‘Selling Climax’ that could occur over the next few weeks. A selling climax is a sharp drop in the market but the indexes end the day higher on nearly double the normal volume. This technical chart pattern usually happens at the end of a correction or bear market when selling has been exhausted and institutions move in to pick up cheap shares.

For the period, the DJIA erased its year-to-date gain sliding 756.03 points (-3.0%) and closed at 24688.31. The S&P 500 lost 109.09 points (-3.9%) and settled at 2658.69. The NASDAQ was down for a fourth consecutive week tumbling 281.81 points (-3.8%) and finished at 7167.21, while the Russell 2000 traded lower for a sixth straight week dropping 58.22 points (-3.8%) ending at 1483.82. The ‘Market Posture’ is Bearish as of the week ending 9/28/18.

The top performing ETF categories for the week ending 10/25/2018 were: Shorts (+3.62%), Sector-Real Estate (+0.50%), Bond-Government Long Term (+0.49%), Bond-Government Intermediate Term (+0.34%) and Commodity-Precious Metals (+0.28%). The weakest categories were: Sector-Energy (-6.98%), Blend-Small Cap (-4.66%), Sector-Financial (-4.30%), Sector-Healthcare (-4.23%) and Sector-Industrials (-3.86%). and To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

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.

Presently the CTI is bearish at -5, unchanged from the previous week. The counts for Cycles D and E are bullish, while Cycles A, B and C are bearish. The ‘Market Posture’ is Bearish as of 9/28/18 (DJIA 26458.24). The CTI is projected to remain Bearish into November.

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 -9, down two notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line dropped 3309 units while the number of new 52-week lows out did the new highs on all five sessions. Breadth was also negative at the NASDAQ as the A/D line lost 3529 units while the number of new lows exceeded the new highs on each day. Finally, the percentage of stocks above their 50-day moving average dropped to 11.7% vs. 18.6% the previous week, while those above their 200-day moving average also fell to 23.9% vs. 34.3%. Readings above 70.0% denote an overbought condition.

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 nine technical indicators that measure excessive speculative or sentiment conditions prevalent in the market.

The Sentiment Index is Neutral at +1, unchanged from the previous week. The Dividend Yield Spread (1.94 vs. 1.88) and The Fear and Greed Index (11.4 vs. 12.2) are Bullish. NYSE short interest rose +0.9% for the period ending 9/28/18 vs. being up +1.3% mid-September. Short interest at the NASDAQ was up +2.3% at the end of September vs. a +2.9% increase on 9/15/18. The VIX, a measurement of fear in the market, (24.16 vs. 19.89), the Total Put/Call Ratio (1.13 vs. 1.06), NAAIM Exposure Index (51.5 vs. 67.8), the Percentage of Bullish Investment Advisors (50.5% vs. 51.9%), and the Bullish-Bearish Investment Advisors Ratio (2.7 vs. 2.8) are Neutral. The Percentage of Bearish Investment Advisors (19.0% vs. 18.3%) and Delta Market Sentiment Index (19.6 vs. 37.4) are Bearish. VIX readings under 13.00 are regarded as bearish while those above 30.0 are bullish.

U.S equity funds, including ETF activity, had inflows of $4.2 billion for the reporting period ending 10/24/18 compared to outflows of $17.5 billion the previous week.

Strength Indexes: The Strength Indexes were all lower for a third straight week and are all in bearish territory. The DJIA fell to 27.6% vs. 34.5% while the S&P 100 slid to 26.0% vs. 29.2%. The NASDAQ 100 dropped to 16.2% vs. 28.6%. While readings above 50.0% indicate that the majority of the stocks in the index are under accumulation, it is the trend that tends to forecast future price direction.

Industry Group Rankings : What’s Hot (9) – What’s Not (82) Of the 91 Industry Groups that we track, 9 are rated as either Strong or Improving while 82 are regarded as Weak or Deteriorating. The previous week’s totals were 20-71. The following are the strongest and weakest groups for the period ending 10/26/18. Strongest: Media-Publishing, Precious Metals, Retailers-Apparel and Diversified Mining. Weakest: Building Materials, Home Construction, Home Furnishings/Appliances and Industrial Technology.

Calendar of Technical Events:

**The above listed technical events occurred for the DIA on the date indicated. DIA is the ETF for the Dow Jones Industrial Average (DJIA).