Federal Reserve Rattles Major Averages

NASDAQ snaps four week win streak despite record high.

Bullish bets on growth and technology stocks sent the NASDAQ higher to start the week and the tech heavy index joined the S&P 500 at a new all-time high at Monday's close. Investors grew more cautious ahead of Wednesday's FOMC announcement on monetary policy however, and the major averages traded in a narrow range going into Wednesday afternoon. As expected, the Federal Reserve left interest rates unchanged, but Fed Chair Jerome Powell's statement that the committee expected to raise rates sooner than earlier forecasts sent stocks sharply lower.

Although Powell's outlook for an uptick in rates was late in 2022, investors threw a taper tantrum and sold equities, sending the DJIA below its 50-day moving average (MA). A spike in the US Dollar (UUP) on Thursday cooled off commodities sending copper, materials, agriculture and gold sharply lower. That was in contrast to a dip in longer yields that left the 10-year Treasury yield at 1.43% and the 30-year T-bill at 2.01%, while the 2-year yield jumped to .25% from .15% flattening the yield curve. Also weighing on the market was an uptick in Initial Jobless Claims on Thursday to 412k, the first print above 400k since mid-May, vs. 359k expected.

Despite a 210.22-point (-0.62%) drop in the Dow Jones on weakness in Energy(XLE), Financials (XLF) and Materials (XLB) on Thursday, money found its way into big cap tech stocks and the NASDAQ posted another record high late in the session after jumping 121.67 points (+0.87%) to 14161.35 on strength in big cap tech. Equities sank at the bell on Friday after St. Louis Fed President James Bullard made comments that inflation was 'more intense than expected' and that Fed Chair Powell "officially opened the door for taper discussions" this week. The DJIA erased all the gains going back to early April at the open and turned in its worst weekly performance of the year. The Financial (XLF) and Materials (XLB) sectors were down more than -6% followed by a -5.4% loss in Energy (XLE), while Industrials (XLI) and Utilities (XLU) fell more than -3%. Technology (XLK) was the only sector to eke out a small gain. Despite new all-time highs for the S&P 500 and NASDAQ during the period, the major averages all ended lower with the NASDAQ snapping its four-week win streak.

For the period, the DJIA tumbled 1189.52 points (-3.4%) and closed at 33290.08. The S&P 500 dropped 80.99 points (-1.9%) and settled at 4166.45. The NASDAQ outperformed but lost 39.04 points (-0.3%) to close at 14030.38, while the small cap Russell 2000 fell 98.07 points (-4.2%) finishing at 2237.74.

Market Outlook: The technical condition of the market deteriorated last week with most of the major averages erasing June's gains. Despite early strength in the S&P 500 and NASDAQ, the different indexes were hit with selling going into the weekend on unwinding of positions in quadruple-witching options expiration. The NASDAQ however, veered away from the other indexes finishing the period with a minor loss, while the Philadelphia Semiconductor Index (SOX) also showed relative strength. The technical indicators for the NASDAQ remain positive with Momentum, as measured by the 14-day RSI, bullish. The NASDAQ does face resistance at its recent high and the chart shows what could end up being a triple top bearish reversal pattern. Momentum is bearish for the broader market.

The DJIA, S&P 500, Russell 2000 and DJ Transportation Index dropped below their respective 50-day MA during the week indicating a change in the intermediate trend of the market. In addition, MACD, a short-term trend gauge, was in negative ground. Momentum also slipped into bearish territory with the 14-day RSI falling below 40 for the Dow Jones and DJ Transportation Index. A fall below 40 in the 14-day RSI usually confirms a trend change. The DJ Transportation Index and small cap Russell 2000 were the worst performers this week and these indexes tend to lead the broader market, both up and down. That negative divergence could indicate further weakness for the different indexes.

More than half of the different sectors finished the week below their 50-day MA which also points to a market that could struggle. Consumer Discretionary (XLY), Financial (XLF), Consumer Staples (XLP), Industrials (XLI), Materials (XLB) and Utilities (XLU) all fell below that key moving average support level. Internal breadth also weakened with the Advance/Decline lines for the NYSE and NASDAQ losing ground, while new 52-week highs contracted but remained positive. Investor Sentiment remains too bullish and institutional investors saw an uptick in bullishness. The National Association of Active Investment Managers (NAAIM) Exposure Index jumped to 98.5 meaning hedge fund managers are almost fully invested in stocks. That's up from only 44.2 at the end of May. Furthermore, the Bullish-Bearish Investment Advisors Ratio shows there are more than triple the number of Bulls to Bears. Both of these indicators show sentiment is once again reaching extreme levels and are looked at as contrarian indicators.

This week the DJIA turned in its biggest weekly percentage loss since January as market participants may have overreacted to 'Fed speak' that seemed to confuse rather than calm the market. While equities tumbled on fears that the reopening trade could be slowing on inflation fears, bonds moved higher, sending yields lower, believing that inflation is transitory. While it is possible that the major averages could rebound quickly, negative divergence in the charts and indicators point to a bull market that was due for a pause. Look for volatility to increase over the coming week as investors debate the Fed's remarks but with a negative Market Edge Cyclical Trend Index (CTI) and slowing momentum, investors may want to give the major averages some breathing room before adding to equities. Downside however, at this stage looks limited. The target for the DJIA is 33245 and 4115 for the S&P 500. The NASDAQ target is 13430.   
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 -9, down three notches from the previous week. Cycle E is bullish, while Cycles A, B, C and D are bearish. The CTI is projected to remain in negative territory into July. At that time we will see a reset of the different cycles that should lead to a resumption of the bull market 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 Neutral at -1, down six notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line dropped 3958 units while the number of new 52-week highs out did the new lows on all five sessions. Breadth was also mixed at the NASDAQ as the A/D line lost 4107 units while the number of new highs beat the new lows on each day. Finally, the percentage of stocks above their 50-day moving average dropped to 52.2% vs. 67.2% the previous week, while those above their 200-day moving average fell to 83.3% vs. 86.3%. 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 6/16/21 shows outflows of $7.1 billion. Currently, the Sentiment Index is Negative at -3, down 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 6/19/2021. 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 (46) What's Not (45). Of the 91 Industry Groups that we track, 46 are rated as either Strong or Improving while 45 are regarded as Weak or Deteriorating. The previous week's totals were 46-45. The following are the strongest and weakest groups for the period ending 6/17/21. Strongest: Health Care Products, Oilfield-Drilling, Pharmaceuticals and Real Estate Investments. Weakest: Media-Publishing, Trucking, Airlines and Beverages. To review all of the Industry Group rankings, click on the Industries tab.
         
ETF Center:  The top performing ETF categories for the week ending 6/17/21 were: Shorts (+3.73%), Sector-Technology (+0.53%), Sector-Internet (+0.50%) and Growth-Large Cap (+0.38%). The weakest categories were: Commodity-Agriculture (-7.38%), Sector-Basic Materials (-6.26%), Commodity-Base Metals (-6.19%), Commodity-Precious Metals (-5.94%) and Sector-Energy (-5.93%). To review all of the ETF categories in the Market Edge universe, click on the ETF tab.

By David L. Blake, CMT