September 22, 2023

Wall Street was cautious ahead of this week's FOMC announcement on monetary policy as investors anticipated a pause in rate hikes. While the Federal Reserve left rates unchanged as expected, the committee left the door open for additional hikes later in the year and emphasized that yields would remain at higher levels for a longer period of time to keep inflation in check. Better than expected economic and jobs data however, pushed yields higher with rates reaching levels not seen since 2007. The rate on the 10-year ended the week at 4.43% and the two-year at 5.09%. The Federal Reserve's hawkish pause on rates sent equities lower and the losses accelerated on Thursday with the major averages falling below key moving average support levels. Consumer spending stocks took some of the hardest hits with restaurants, casinos and housing stocks some of the weakest Industry Groups. The Consumer Discretionary (XLY) and REITs (XLRE) sectors led the market lower, both down more than -4.5%, followed by weakness in Materials (XLB) and Financial (XLF). The Regional Bank ETF (KRE) dropped -5.8% as banks prepared for more consumer loan losses due to higher rates. Crude oil prices were one pocket of strength as prices remained above $90 a barrel despite demand concerns from expected slower growth. The US Dollar was also strong as it nudged higher for a 10th consecutive week hitting its highest mark since last November. After three consecutive days of losses the major averages tried to stage a muted bounce on Friday before it faded into the close and the S&P 500 and NASDAQ finished the week down for a third straight week and the DJIA lower for a second week over the last three.

For the period, the DJIA lost 654.40 points (-1.9%) and settled at 33963.84. The S&P 500 lost 130.26 points (-2.9%) and closed at 4320.06. The NASDAQ tumbled 496.52 points (-3.6%) finishing at 13211.81, while the small cap Russell 2000 gave up 70.53 points (-3.8%) finishing at 1776.50.

Market Outlook: The technical condition of the market deteriorated this week as the major averages finished the period sharply lower as rates soared. Key moving average support levels were violated by the major averages as they all broke below their respective 100-day MA and the small cap Russell 2000 dropped below its 200-day MA for the first time since early June. The technical indicators are in bearish territory with Momentum, as measured by the 14-day RSI, negative and dipping below 40, a reading that indicates a longer-term trend change. The DJIA recorded a bearish Head & Shoulders (H&S) chart breakout during the period which points to 32750-32800 as a downside target for the blue-chip index. The S&P 500 and NASDAQ are showing tentative H&S patterns but haven't completed the pattern yet. However, the next support level for the S&P 500 is at 4190-4200 with the 200-day MA at 4190. A downside target for the NASDAQ is 12680-12700 with the 200-day MA at 12469. The secondary indexes, which include the DJ Transportation Index, Russell 2000 and Philadelphia Semiconductor Index also dropped below key MA support, however, all three indexes are deeply oversold with stochastics in single digits which could lead to a short-lived bounce next week. 

Underlying breadth continues to weaken with the NYSE and NASDAQ Advance/Decline lines again losing ground. The NYSE accumulative A/D line has nearly retraced all of its gains since early June. New 52-week lows continue to outnumber the new highs on both exchanges with the new lows expanding. The number of new lows on the NYSE hit 220 on Thursday which was the most since May. While not carrying the same weight, the number of new lows on the NASDAQ totaled 443 on Thursday, the most since April. Investor sentiment remains neutral but there was a reduction in the percentage of bulls in retail and the pros ahead of the FOMC Meeting. 

With the Fed anticipating another rate hike before year end, investors positioning for a Santa rally may be disappointed. The major averages ended the period in a bearish pattern of lower highs and lower lows and key support levels failed to hold. The CME Group FedWatch projects only a 27.4% probability of a 0.25-point hike on November 1, but the odds increase to a 36.7% chance in December. As they say, don't fight the Fed, and as we saw this summer, stocks will struggle to advance when a hawkish Fed is telegraphing that another rate hike could be on the horizon. In addition, higher yields now favor risk off assets which will lead to diminishing dollars chasing growth in equities. While analysts are still hoping that our resilient economy will only suffer a shallow or soft landing as the Fed tightens policy, historical measures still project a recession could be in the cards. With that in mind, remember, hope is not an investment strategy. For that reason, with fixed income rates the most attractive they’ve been in decades, it might be time for investors to revisit the benefits of portfolio diversification. 

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, unchanged from the previous week. Cycles C and D are bullish, while Cycles A, 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 -11, down three notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line dropped 3479 units while the number of new 52-week lows exceeded the number of new highs on five sessions. Breadth was also negative at the NASDAQ as the A/D line lost 5962 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 21.6% vs. 36.7% the previous week, while those above their 200-day moving average fell to 38.7% vs. 48.6%. 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, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 9/20/23 shows outflows of $7.8 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). 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 (31) What's Not (60). Of the 91 Industry Groups that we track, 31 are rated as either Strong or Improving while 60 are regarded as Weak or Deteriorating. The previous week's totals were 34-57. The following are the strongest and weakest groups for the period ending 9/21/23. Strongest: Coal, Internet-Content, Oil-Secondary and Media-cable Broadcasting. Weakest: Electrical Equipment, Airlines, Medical/Adv Devices and Forest Products. 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 9/21/23 were: Shorts (+6.70%), and Commodity-Precious Metals (+1.03%). The weakest categories were: Sector-Alternative Energy (-7.53%), Sector-Internet (-5.99%), Blend-Small Cap (-5.86%), Specialty Technology (-5.67%) and Specialty Real Estate (-5.37%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT