A Dip and a Rip

Market Letter (Weekly)

September 24, 2021

A Dip and a Rip

Stocks shake off debt scare to finish week higher.

The bull looked a little worse for the wear as it headed into the weekend after a wild run ended with the major averages posting mostly positive. Global markets opened sharply lower to start the week after Evergrande, China's largest property developer, warned of a possible default on billions in debt. The DJIA dropped 971-points at Monday's open, but investors bought the dip after fears of contagion outside China diminished. The major averages intraday finally saw their first 5% correction off recent highs since last October, ending the session down almost 2%. Cautious trading on Tuesday left the different indexes mixed as investors hoped for better news out of the FOMC Meeting Announcement on Wednesday and got it. A report that Evergrande was on track to make a debt payment, coupled with an accommodative Fed statement on Wednesday kicked off a snap-back rally in equities, ending a four-day slide in the Dow and S&P 500. The blue-chips surged 844.98-points led by strength in reopening and cyclical sectors and the major averages had mostly erased the losses to start the week. Interest rates ticked higher on the Fed's outlook for the economy and the yield on the 10-year Treasury closed the week at 1.45%, its highest level since July, while the 30-year T-Bill yield closed at 1.97%. Rate sensitive sectors were some of the weakest market groups with REITs (XLRE) and Utilities (XLU) finishing lower, but Communication Services (XLC) was the worst performing link on weakness in shares of Facebook (FB) on worries over holiday ad sales and boycotts over content. Leading the market rebound was strength in Energy (XLE) after crude oil prices traded as high as $73 on a drop in inventory and OPEC projecting demand at prepandemic levels by early 2022. The bull was back on the run on Friday after a volatile week and the major averages closed out the week with the DJIA snapping a three-week losing streak and the S&P 500 and NASDAQ bringing an end to their two-week slide.

For the period, the DJIA gained 213.12 points (+0.6%) and closed at 34798.00. The S&P 500 added 22.49 points (+0.5%) and settled at 4455.48. The NASDAQ picked up 3.73 points (+0.0%) to close at 15047.70, while the small cap Russell 2000 increased 11.20 points (+0.5%), finishing at 2248.07.

Market Outlook: The technical condition of the market was mixed this week as the major averages were able to recoup from sharp losses early. The technical indicators finished in neutral ground for the different indexes but were improving. After falling below key moving average (MA) support levels early in the period, the major averages reversed course and headed higher. The DJIA was back above its 100-day MA, but remained below its 50-day MA, while the S&P 500 and NASDAQ were both able to close above their respective rising 50-day MA. The small cap Russell 2000 rose above its 50 and 100-day MA but remained locked in its trading range that has been in place since February. While the market was able to bounce back from Monday's tumble, the rise in rates, as investors look ahead to the Fed's tapering of asset purchases, will change the dynamic of which sectors should outperform. Positive momentum can be found in Energy (XLE), Consumer Discretionary (XLY), Financials (XLF) and at least for now, Technology (XLK). Rate sensitive sectors are in the process of testing support levels that need to be watched if rates tick higher. 

Internal breadth was also mixed with the NYSE and NASDAQ Advance/Decline lines little changed, while new 52-week highs vs. new lows were about even. Despite the wild swings in the different indexes volume was about normal, with no indications that Monday's selloff was a washout. Often a correction on high volume will indicate that traders may be throwing in the towel, representing a good entry for longer term investors. Sentiment remains neutral after backing off extreme levels of bullishness in the summer. This week Investors Intelligence reported the Percentage of Bullish Investment Advisors fell to 47.1%. That's the lowest percentage of Bulls since May 2020. That is also the last time bullish retail investors were this low. After sliding to 22.4% the previous week, the American Association of Individual Investors (AAII) saw bulls improve to 29.9%, however, that remains below its historical average of 38%.

Monday's selloff appears to be in the rearview mirror and market participants can finally put to rest that the market needed to endure a 5% correction before moving higher. Another positive point going forward is the Federal Reserve's transparent guidance for when tapering of assets is likely to begin. However, the stock market needs to climb a wall of worry and this week's rise in interest rates could be the next bump in the road. Yields on Treasuries peaked earlier in the year in March which weighed on growth stocks, overweighted big cap technology stocks and the FAANG names. This week's uptick in rates pushed the 10-year rate above resistance of 1.37% and could lead to an increase to 1.75%. With the Federal Reserve projecting expansion in the economy, we're likely to once again see that rotation out of growth stocks and into cyclical industries which could lead to the major averages making a run back to new highs if rates don't rise too fast.

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 +10, down two notches from the previous week. Cycles B, C, D and E are bullish, while Cycle A is bearish. The CTI is projected to remain in a positive configuration into the fall. 

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 Positive at +4, up two notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 481 units while the number of new 52-week highs out did the new lows on three of the five sessions. Breadth was mixed at the NASDAQ as the A/D line added 884 units while the number of new lows beat the new highs on three days. Finally, the percentage of stocks above their 50-day moving average rose to 47.8% vs. 47.1% the previous week, while those above their 200-day moving average eased to 59.6% vs. 59.7%. Readings above 70.0% denote an overbought condition, while below 20% is bullish.

Sentiment Index (SI): Measuring the marketís 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. In addition, we track money flows into and out of Equity Funds and ETFs which as of 9/22/21 shows outflows of $6.7 billion. Currently, the Sentiment Index is Neutral at +2, unchanged from the previous week. 

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 7/30/2021 (DJIA  34935.47). 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 (28) What's Not (63). Of the 91 Industry Groups that we track, 28 are rated as either Strong or Improving while 63 are regarded as Weak or Deteriorating. The previous week's totals were 37-54. The following are the strongest and weakest groups for the period ending 9/23/21. Strongest: Marine Transportation, Paper Products, Media-Publishing and Aluminum. Weakest: Airfreight/Couriers, Precious Metals, Metals-Non Ferrous and Diversified Mining. To review all of the Industry Group rankings click on the Industries tab.
ETF Center:  The top performing ETF categories for the week ending 9/23/21 were:  Sector-Energy (+2.85%), Blend-Small Cap (+1.79%), Sector-Financial (+1.58%), Commodity-Energy (+1.52%), Commodity-Blend (+1.26%). The weakest categories were: Shorts (-2.14%), Sector-Alternative Energy (-1.05%), Bond-International (-1.03%) and Sector-Telecom (-0.86%). To review all of the ETF categories in the Market Edge universe, click on the ETF tab.

By David L. Blake, CMT

Market Timing Models   Current Reading Prior Week Connotation
Cyclical Trend Index (CTI):     10   12   Positive
Momentum Index:     4   2   Positive
Sentiment Index:     2   2   Neutral
Strength Index - DJIA (DIA):     17.2   37.9   Negative
Strength Index - NASDAQ 100 (QQQ):   42.9   53.2   Negative
Strength Index - S&P 100 (OEX):     24.7   44.1   Negative
Dow Jones Industrial Average (DJIA):   34798.00   34584.88   0.6%
S&P 500 Index:   4455.48   4432.99   0.5%
NASDAQ Composite Index:   15047.70   15043.97   0.0%
 *Connotation is Positive or Negative Divergence from the DJIA    
Momentum Index Components Current Reading Prior Week Connotation
*Dow Jones Industrial Averages (DJIA): 34798.00 34584.88    
*DJ Transportation Ave     14343.49 14267.96   Negative
*S&P 500 Index 4455.48 4432.99   Positive
*NYSE Composite Index 16539.15 16460.35   Negative
*NYSE Advance - Decline Line 523827 523346   Positive
*10 Day MA Advance - Decline Line 1.01 0.79   Positive
*NDX 100 Index 15329.68 15333.47   Positive
*NASDAQ Composite Index 15047.70 15043.97   Positive
*DJ Utilities Index 892.80 903.80   Negative
*Russell 2000     2248.07 2236.87   Positive
Trin - 5 Day Average 0.94 1.15   Neutral
NYSE Weekly New Highs - New Lows  239-132 289-97   Positive
Zweig Breadth Indicator 0.41 0.36   Neutral
McClellan Oscillator -10 65   Neutral
McClellan Summation Index 799 1051   Positive
Unchanged Issue Index 0.04 0.04   Negative
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index - 5 Day Average 27.20 35.20   Neutral
Shares Sold Short NYSE - Monthly (000) 14049026 14107144    
NYSE Short Interest Ratio - NYSE Only 2.6 2.7   Bullish
Shares Sold Short NASDAQ  - Monthly (000) 11023176 10999783    
NASDAQ Short Interest Ratio 2.8 2.7   Bullish
AAII Bull-Bear Ratio 0.8 0.6   Bullish
Put/Call Ratio - 5 Day Avg All Equity Options 0.99 0.94   Bearish
Dividend Yield Spread 0.34 -0.35   Bullish
NAAIM Exposure Index 77.7 87.0   Neutral
Bullish Investment Advisors 47.1 50.0   Neutral
Bearish Investment Advisors 22.3 22.1   Neutral
Bullish - Bearish Investment Advisors Ratio 2.1 2.3   Neutral
VIX - CBOE Volatility Index 17.75 20.81   Neutral

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Market Posture Cyclical Trend Index
As of: 07/30/2021
As of: 09/24/2021
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Market Recap - 09/24/2021

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 15047.7 -4.54 -0.03% 16.75%
DJ UTILITIES 892.8 -0.81 -0.09% 3.26%
DJ TRANSPORT 14343.49 109.09 0.77% 14.68%
DJ INDUSTRIALS 34798 33.18 0.1% 13.69%
NYSE COMPOSITE 16539.15 -28.11 -0.17% 13.87%
S & P 100 INDEX 2045.17 4.1 0.2% 18.87%
RUSSELL 2000 2248.07 -10.97 -0.49% 13.83%
S&P 500 4455.48 6.5 0.15% 18.62%
CBOE MKT VOLATILITY 17.88 -0.75 -4.03% -21.41%
AMEX COMPOSITE 3156.52 16.17 0.51% 33.7%
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