December 2, 2022

A volatile week left the major averages higher as both bulls and bears found something to applaud. Stocks struggled coming back from the holiday week as demonstrations in China over covid policies rattled global markets. Despite strong Black Friday and Cyber Monday sales, tough talk from Fed officials James Bullard and John Williams on rate hikes also kept pressure on equities as interest rates ticked higher on their comments. The S&P 500 dropped -1.58% on Monday with every sector red. Investors remained cautious ahead of a Wednesday speech by Fed Chair Jerome Powell on policy, but Powell gave the bulls a bone. Laying out the groundwork for the Central Bank to moderate rate hikes going forward, stocks surged into the close in a broad-based rally led by technology shares. The NASDAQ soared +4.41%, while the DJIA picked up 737.25-points (+2.18%) hitting a seven-month high. The stock market was steady on mixed economic data on Thursday, but a stronger-than-expected jobs report on Friday bolstered the bears sending yields once again higher and stocks lower at the open before the major averages rallied back to finish the day mixed. After jumping as high as 3.79% during the week the yield on the 10-year Treasury settled at 3.49% on Friday, while the two-year T-Bill topped out at 4.55% before landing at 4.29%. Although Friday's jobs report pointed to more work for the Federal Reserve, the CME Group FedWatch still projects a 77% probability of a 0.50-point hike at the December FOMC Meeting announcement on December 14. The market sectors finished the period mostly higher with Communication Services (XLC), Consumer Discretionary (XLY), Healthcare (XLV), Materials (XLB) and Technology (XLK) outperforming, while Energy (XLE) and Financials (XLF) were the weakest groups. Crude oil prices rallied from a low near $73 a barrel on concerns of a slowdown in China on Monday to close at $80.16 a barrel as NATO tried to set a price cap on Russian oil. The major averages were able to consolidate gains ahead of the weekend leaving the different indexes higher for a second straight week and up for a third week over the last four.

For the period, the DJIA added 82.85 points (+0.2%) and settled at 34429.88. The S&P 500 picked up 45.58 points (+1.1%) and closed at 4071.70. The NASDAQ gained 235.14 points (+2.1%) finishing at 11461.50, while the small cap Russell 2000 jumped 23.65 points (+1.3%), finishing at 1892.84.

Market Outlook: The technical condition of the market was little changed but remained positive this week on back-and-forth trading that left the major averages higher. MACD, a short-term trend gauge, crossed into bearish ground for several indexes, but Momentum, as measured by the 14-day RSI, remained positive but was slowing after the market's rally off the October low. The DJIA has surged +19.9% off that low, but the S&P 500 and NASDAQ are showing negative divergence having gained only +13.6% and 12.4% respectively. While the Dow Jones was able to take out resistance at its 200-day MA in late October, the S&P 500 crossed that level on Wednesday and was able to retest that support and trade higher. The NASDAQ continued to struggle just below its 100-day MA. The DJIA and Philadelphia Semiconductor Index (SOX) have also traded above a descending trend line off the highs from the January-October selloff, which confirms their trend change. The S&P 500 traded up to its descending trend line before its rally stalled but looks poised to break above that resistance level soon. The bellwether index will need to close above 4075 to confirm its trend change. The NASDAQ trend line comes into play around 12040, but it remains more than 500-points below that level. Finally, the VIX dipped below 20 this week showing traders may be coming complacent but that could be a cautionary signal. The VIX has traded below 20 on three occasions this year, in February, April and August, and that has marked a top for the major averages on each occasion. The VIX closed on Friday at 19.06. Underlying breadth continued to improve with the NYSE and NASDAQ Advance/Decline lines moving higher for the third week out of the last four. New 52-week highs on the NYSE topped the new lows for a third consecutive week, while the NASDAQ new high list outdid the new lows on Thursday for the first time since mid-August. Investor Sentiment was mixed with the Percentage of Bullish Investment Advisors higher than the Percentage of Bearish Investment Advisors for a third straight week, but retail investors took another step back to only 24.5% bullish and down from 33.5% two-weeks ago. The National Association of Active Investment Managers (NAAIM) Exposure Index rose to 64.4%. thatís the most exposure to equities for the professionals since 71.6% in mid-August.

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 +8, unchanged from the previous week. Cycles B, C and D are bullish, while Cycles A and E are bearish. The CTI is projected to remain in a positive configuration into December.

Momentum Index (MI): The marketís 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 Neutral at -2, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 1625 units while the number of new 52-week highs exceeded the number of new lows on three of the five sessions. Breadth was mixed at the NASDAQ as the A/D line added 1391 units while the number of new lows out did the new highs on four days. Finally, the percentage of stocks above their 50-day moving average increased to 78.3% vs. 76.4% the previous week, while those above their 200-day moving average jumped to 52.0% vs. 46.3%. 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 marketís 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 +4, up two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 11/30/22 shows outflows of $7.7 billion. 

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 10/21/2022 (DJIA - 31082.6). 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 (89) What's Not (2). Of the 91 Industry Groups that we track, 89 are rated as either Strong or Improving while 2 are regarded as Weak or Deteriorating. The previous week's totals were 88-3. The following are the strongest and weakest groups for the period ending 12/01/22. Strongest: Oilfield-Equipment, Casinos, Metals-Non Ferrous and Retailers- Apparel. Weakest: Internet-Software, Automobile Manufacturing, Advertising and Transportation Equipment. 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 12/01/22 were: Sector-Internet (+7.86%), Commodity-Base Metals (+4.47%), International-Emerging (+3.89%), Bond-International (+3.63%) and Commodity-Precious Metals (+3.43%). The weakest categories were: Shorts (-1.92%), Sector-Alternative Energy (-0.78%) and Bond-Government Short Term (-0.08%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT