March 24, 2023

Equities surged sharply higher to start the week as fears of a banking crisis eased and on hopes that the Federal Reserve would signal a pause to rate hikes after Wednesday's FOMC Meeting. A 0.25-point rate hike, however, was followed by a more hawkish than expected Fed Chair Powell which sent the major averages and nearly erased the early rally. Central Banks in Europe also kicked rates higher during the week reigniting recession fears and yields nudged lower as the period was ending with the 10-year Treasury yield slipping to 3.38% and the two-year T-Bill rate landing at 3.77%, down from 5.07% earlier in the month. With banking shares struggling, investors rotated into big cap technology and FANNG stocks boosting the Communication Services (XLC0 and Technology (XLK) sectors, while Energy (XLE) and Materials (XLB) also outperformed. Only REITs (XLRE) and Utilities (XLU) closed the period in the red. Crude oil prices were little changed at Friday's close, after a volatile week, on worries of an economic slowdown with the May contract finishing at $69.20 a barrel. Friday's rally helped the S&P 500 and NASDAQ extend their gains for a second straight week, and the DJIA was able to snap a two-week losing streak.

For the period, the DJIA picked up 375.55 points (+1.2%) and settled at 32237.53. The S&P 500 added 54.35 points (+1.4%) and closed at 3970.99. The NASDAQ jumped 193.45 points (+1.7%) finishing at 11823.96, while the small cap Russell 2000 rose 9.03 points (+0.5%) finishing at 1734.92.

Market Outlook: The technical condition of the market remained mixed this week with the major averages closing higher on marginal gains. A late bounce on Friday kept the DJIA, S&P 500 and NASDAQ positive for the week, but the DJ Transportation Index slipped lower for a third consecutive week. The shift to big technology shares pushed the Philadelphia Semiconductor Index into the plus column for a second straight week. Despite a positive finish for the Dow Jones, the blue-chip index remained below its 200-day MA and the technical indicators are neutral. The S&P 500 was able to close above its 100 and 200-day MA on Friday and was able to stay above the December low this week which is a positive for the market going forward. The technical indicators are mixed with MACD, crossing to a bullish trend, while Momentum, as measured by the 14-day RSI, is neutral  but improving. The NASDAQ has outperformed on strength in technology and trades above key MA support levels. The technical indicators are in positive ground with MACD, a short-term trend gauge, bullish. Negative divergence is seen in the DJ Transportation Index and Russell 2000 with the technical indicators in bearish ground. In addition, the Russell 2000 dipped below its December low and the transports came within a chip shot of that support area on Thursday and again on Friday. The Philadelphia Semiconductor Index is showing positive divergence having a hit a new Y-T-D high on Thursday. 

Underlying breadth was mixed. The NYSE and NASDAQ Advance/Decline lines, which are leading indicators of market direction, were able to post small gains, while new 52-week lows outnumbered the new highs throughout the week but showed a narrow contraction. Despite the banking turmoil, Investor Sentiment is bearish, but little changed from last week. Retail bulls, according to the American Association of Individual Investors (AAII) saw a slight tick higher after dipping to their lowest percentage since last September the previous period. Even the pros seem unable to agree on the markets next move. The National Association of Active Investment Managers (NAAIM) Exposure Index increased to 53.2% after buying into last week's drop, but the Percentage of Bullish Investment Advisors ticked lower to a Bearish 39.7%. 

After last week's banking crisis the Federal Reserve and Secretary-Treasurer Janet Yellen responded quickly to guarantee deposits at the troubled banks and calm investors. Equities rallied on hopes that the Fed would need to pause their tightening process to prevent further damage and manage risk in the banking system. The good news for investors is that yields are moving lower and once the clouds clear from around the banking system, we could see a rally into May. We're entering a seasonally strong for period for the market and if we don't see any additional problems to banks, and if this week's lows are not violated, it might be time to allocate some money to buying dips in the stock market.

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, up eleven notches from the previous week. Cycles A, B, C and D are bullish, while Cycle E is bearish. The CTI is projected to stay positive into May. 

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 Neutral at +2, unchanged from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 776 units while the number of new 52-week lows exceeded the number of new highs on all five sessions. Breadth was also mixed at the NASDAQ as the A/D line added 614 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 eased to 22.5% vs. 24.2% the previous week, while those above their 200-day moving average slipped to 39.4% vs. 41.4%. 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 Positive at +3, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 3/22/23 shows inflows of $11.9 billion. That's the first time in five-weeks that we've had inflows.

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 3/24/2023 (DJIA - 32237.53). 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 (19) What's Not (71). Of the 91 Industry Groups that we track, 19 are rated as either Strong or Improving while 71 are regarded as Weak or Deteriorating. The previous week's totals were 44-47. The following are the strongest and weakest groups for the period ending 3/23/23. Strongest: Semiconductors & Related, Advertising, Internet-Software and Automobile Manufacturing. Weakest: Internet-Financial, Banks-Eastern, Banks-Western and Internet-Content. 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 3/09/23 were: Commodity-Precious Metals (+4.51%), Commodity-Base Metals (+3.10%), Shorts (+2.91%), Sector-Internet (+2.77%) and Bond-Inflation Protected (+1.85%). The weakest categories were: Specialty Financial (-4.53%), Specialty-Real Estate (-4.43%), Blend-Small Cap (-3.93%), Specialty Utilities (-3.37%) and Value-Mid Cap (-3.28%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT