April 26, 2024

The major averages recovered from oversold conditions this week on the back of mostly better-than-expected earnings. With the exception of Meta Platforms (META), which dropped -16% after disappointing investors, big cap technology shares delivered and guided higher led by Microsoft (MSFT) and Alphabet (GOOGL) on cloud-computing strength and AI. Semiconductors were also strong with the Philadelphia Semiconductor Index surging +9.9% off the previous week's low. The market's rebound looked in jeopardy on Thursday however, after Q1 GDP came in at +1.6%, below estimates of +2.5%, and down from +3.4% in Q4 2023. A jump in inflation to +3.7% YoY in the quarter, above expectations of +3.4% also rattled investors. Yields increased to five-month highs and equities sank with the DJIA down 607-points early before paring the loss late. The different indexes caught a break on Friday getting a boost from gains in Alphabet (GOOGL) and Microsoft (MSFT) and trading higher after the March core-PCE came in as expected, despite a small uptick YoY. The weekly gains were broad based with every sector finishing the period higher led by strength in Technology (XLK), Consumer Discretionary (XLY), Industrial (XLI) REITs (XLRE) and Consumer Staples (XLP). Energy (XLE) and Materials (XLB) lagged the other market groups. Yields remained elevated as inflation remained sticky with the rate on the 10-year Treasury closing at 4.67% and the two-year T-Bill landing at 5.006%. Next week the FOMC Meeting gets underway and market participants are expecting the Federal Reserve to leave rates unchanged. After recent hotter than expected inflation data, the CME Group FedWatch projects September as the most likely candidate for a Fed rate cut. However, investors will hang on Fed Chair Jerome Powell's comments after next week's FOMC Meeting concludes for hints on monetary policy and when and whether, a rate cut remains on the table. While the week ended on a high note with the S&P 500 snapping a two-week losing streak, the major averages remained below key moving average resistance levels, which should keep investors cautious over the near-term.

For the period, the DJIA added 253.26 points (+0.7%) and settled at 38239.66. The S&P 500 picked up 132.73 points (+2.7%) and closed at 5099.96. The NASDAQ jumped 645.89 points (+4.2%) finishing at 15927.90. The small cap Russell 2000 gained 54.34 points (+2.8%) and settled at 2002.00.

Market Outlook: The technical condition of the market was mixed this week as volatility increased as equities continued to battle rising rates. The major averages gained some upside momentum and the technical indicators marginally improved but are regarded as neutral at this stage. The major averages tested and held key MA support levels and the DJIA, NASDAQ and Russell 2000 were able to close back above their respective 100-day MA as the week ended, while the S&P 500 and Philadelphia Semiconductor Index ran into resistance just below their 50-day MA. There was a noticeable shift in sector rotation during the last few weeks with more cyclical areas of the market gaining relative strength. These include improvement in Industrial (XLI), Financial (XLF), Energy (XLE), Utilities (XLU), Consumer Staples (XLP) and Materials (XLB) which all closed the period back over their respective 50-day MA which is a plus for the market going forward. Technology (XLK), Consumer Discretionary (XLY), Communication Services (XLC) and Healthcare (XLV) are lagging the broader market despite improvement this week after gains due to earnings from overweighted big caps. As mentioned last week, the oversold condition of the major averages and positive divergence in underlying breadth pointed to a snap-back bounce this week. However, with the different indexes trading below their 50-day MA, until we see that resistance level taken out, this week's move has to still be considered an oversold bounce.

Underlying breadth was mostly positive this week with the NYSE and NASDAQ Advance/Decline lines moving higher while new 52-week highs on the NYSE marginally outdid the new lows.  

Investor Sentiment saw a big step back from overly bullish to a neutral position. The American Association of Individual Investors (AAII) saw a -6.2% drop in the bulls, falling to the lowest percentage of bulls since the last week of October, with bearish retail investors outnumbering bulls. The pros also are back on their heels with the Percentage of Bullish Investment Advisors dropping from a three-year high of 62.5% a month ago, to a neutral 46.2%.

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 Neutral at +1, unchanged from the previous week. Cycles B, D and E are bullish, while cycles A and C are bearish. While the forecasting model for the market was projected to show a tradable bottom several weeks ago with several cycles due to reset, that reset never occurred and the cycles are extended. After the cycles extended past what would be considered a time for a reset, the CTI is changed to a neutral configuration until an identifiable bottom can be seen on the charts and then reset. The current selloff will likely be cause for a reset of several cycles. 

Momentum Index (MI): The markets 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 Positive at +6, up four notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2562 units while the number of new 52-week highs exceeded the number of new lows on three sessions. Breadth was mixed at the NASDAQ as the A/D line added 2495 units while the number of new lows out did the new highs on three days. Finally, the percentage of stocks above their 50-day moving average jumped to 35.6% vs. 25.7% the previous week, while those above their 200-day moving average rose to 60.1% vs. 55.5% the prior week. 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.

Market Posture: Based on the status of the Market Edge, market timing models, the 'Market Posture' is Neutral as of the week ending 03/22/2024 (DJIA - 39475.90). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below. 

Industry Group Rankings: What's Hot (22) What's Not (69). Of the 91 Industry Groups that we track, 22 are rated as either Strong or Improving while 69 are regarded as Weak or Deteriorating. The previous week's totals were 31-60. The following are the strongest and weakest groups for the period ending 04/11/24. Strongest: Aluminum, Precious Metals, Metals Non-Ferrous and Heavy Construction. Weakest: Trucking, Retailers-Drug Based, Cosmetics/Personal Care and Media-Cable Broadcasting. To review all the Industry Group rankings in the Market Edge universe, click on the Industry Group tab.

ETF Center: The top performing ETF categories for the week ending 04/25/24 were: Specialty Financial (+3.56%), Specialty Utilities (+2.82%), Blend-Small Cap (+2.75%), Sector-Energy (+2.45%) and Sector-Consumer Staples (+2.41%). The weakest categories were: Shorts (-2.83%), Commodity-Precious Metals (-2.19%), Sector-Telecom (-1.85%), Specialty Communications (-1.85%) and Bond-Government Long Term (-0.98%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT