February 28, 2025

High momentum, technology stocks and the 'Mediocre 7' took it on the chin this week as the selloff knifed through key MA support levels leaving the NASDAQ negative for the year. Slowing growth jitters surrounding the White House policy on tariffs and sticky inflation kept pressure on equities despite yields nudging to their lowest levels of the year. Mixed economic data and a drop in February Consumer Confidence to 98.3 from 105.3 the prior month reintroduced a possible second rate cut during the year and the yield on the 10-year treasury closed the period at 4.213% and the two-year T-Bill landed at 3.997%. Investors rotated into defensive sectors early in the week waiting on earnings from Nvidia (NVDA) before the NASDAQ was able to snap a four-day losing streak. The AI chip maker handily beat on the top and bottom line, but the results were viewed as 'good, but not good enough' leading to a steep selloff in the stock and the different indexes on Thursday. The Philadelphia Semiconductor Index (SOX) dropped -6.09% and was down -7.2% on the week. The major averages got some relief on Friday as the January PCE, the Fed's preferred inflation gauge, was in line and core-PCE slowed to +2.6% YoY from +2.9% the prior month and the first monthly slowdown in four. Despite Friday's lift, the major averages limped into the weekend with the DJIA modestly higher, but the S&P 500 and NASDAQ down for a second straight week. Next week the focus will be on February jobs with a full slate of economic data throughout while investors look for signs the economy is slowing more than expected. 

For the period, the DJIA added 412.89 points (+1.0%) and settled at 43840.91. The S&P 500 fell 58.63 points (-1.0%) and closed at 5954.50. The NASDAQ tumbled 676.73 points (-3.5%) finishing at 18847.28, while the small cap Russell 2000 lost 32.28 point (-1.5%) and settled at 2163.07.

Market Outlook: The technical condition of the market deteriorated further this week as the different indexes tumbled into March. The technical indicators are in negative ground with trend gauge MACD bearish and momentum studies moving lower. While the DJIA regained its 50 and 100-day MA, the S&P 500 and NASDAQ closed below that key MA support level. The NASDAQ was able to bounce off its 200-day MA on Friday, last breeched in August 2024, but erased all its gains going back to the first of November. However, with stochastics for the major averages down around 10, after two weeks of losses we could see some follow through to Friday's oversold bounce as March kicks off. The secondary indexes, including the DJ Transportation Index, small cap Russell 2000 and Philadelphia Semiconductor Index, which technicians like to see leading the market higher and lower, are all below their respective 50, 100 and 200-day moving average. The Philadelphia Semiconductor Index and Russell 2000 have also erased all their gains going back to September 2024. The weekly charts for the major averages continue to portray negative divergence indicating that the recent new highs by the S&P 500 and NASDAQ 100 were made on less momentum. The pullback also shows a rotation into defensive sectors as investors trim risk with Consumer Staples (XLP), REITs (XLRE), Utilities (XLU), Energy (XLE) and Healthcare (XLV) are the strongest market groups over the last month. The VIX, or Volatility Index, is also rising hitting its highest closing mark since December on Thursday, pointing to growing nervousness among traders. 

Underlying breadth was negative with the NYSE and NASDAQ Advance/Decline lines, considered leading indicators of market direction, moving mostly lower showing stocks remain under distribution. New 52-week lows on both the NYSE and NASDAQ outdid the new highs with the NASDAQ recording new lows in the mid 300's, the most since the selloff in August 2024.  

Investor Sentiment is still mixed with a sharp contrast between money managers and retail investors. Retail investors jumped into the bear camp as the American Association of Individual Investors (AAII) survey showed 60.6% of retail investors are bearish, the most since September 2022. Retail bulls fell to 19.4% last week, the fewest since March 2023. The professionals remain bullish but inched closer to neutral as the National Association of Active Investment Managers (NAAIM) Exposure Index this week eased to 87.9% from 91.5% the prior week. The Percentage of Bullish Investment Advisors fell to a neutral 44.3%. In addition, FINRA reported January margin debt reached $937,253,000. That tops the level last seen in October 2021 which marked the top of the markets rally and the start of the bear market that ended in October 2022. The margin debt is a big red flag as it can induce margin calls and forced selling as the major averages work lower. Finally, short interest soared more than 4% on the NYSE and the NASDAQ with short interest at the S&P 500 and NASDAQ at new record highs.

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 -1, down three notches from the previous week. Cycles B and E are bullish, while Cycles A, C and D are bearish. The CTI is projected to remain in a negative configuration through March.

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 Negative at -6, down six notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 310 units while the number of new 52-week lows exceeded the number of new highs on each session. Breadth was negative at the NASDAQ as the A/D line dropped 2670 units while the number of new lows out did the new highs on all five days. Finally, the percentage of stocks above their 50-day moving average dropped to 42.0% vs. 57.5% the previous week, while those above their 200-day moving average fell to 48.9% vs. 57.2% 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 a notch from the previous week.

Market Posture: Based on the status of the Market Edge, market timing models, the 'Market Posture' is Bearish as of the week ending 2/28/2025 (DJIA - 43840.91). 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 (8) - What's Not (22): The following are the strongest and weakest Industry Groups for the period ending 2/27/25. Strongest: Insurance, Integrated Oil & Gas, Conglomerates and Paper & Forest Products. Weakest: Construction, Building Materials, Retail and Chemicals. 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 2/27/25 were: Shorts (+5.24%), Bond-Government Long Term (+2.88%), Bond-Multisector Aggregate (+1.21%), Bond-Corporate Invest Grade (+1.01%) and Bond-Government Interm Term (+0.88%). The weakest categories were: Specialty Technology (-9.92%), Blend-Small Cap (-6.63%), Growth-Mid Cap (-6.42%), Sector-Alternative (-6.42% and Growth-Small Cap (-6.21%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT