July 26, 2024

Volatility returned to the stock market in a big way this week as investors juggled dip buying, lackluster earnings from the Magnificent 7 and a rotation into small caps and cyclical areas of the market. Coming off its worst week since April, the NASDAQ reversed course on Monday led by a +4.00% spike in semiconductors before weaker than expected manufacturing and housing data on Tuesday left the major averages mixed. Disappointing earnings from Alphabet (GOOGL) and Tesla (TSLA) on Wednesday triggered a selloff in big cap tech shares and semiconductors with the Philadelphia Semiconductor Index sinking -5.41% and the NASDAQ down 654.94 points (-3.64%), its biggest one-day drop since 2022. A better-than-expected Q2 GDP print of +2.8%. vs. +1.9% expected set off another snap back rally on Thursday on hopes a soft landing for the economy remained in play. The DJIA soared 584.95 points and the small cap Russell 2000 surged +2.8% early but ran out of steam late nearly erasing all the gains leaving the different indexes mixed. A mostly inline PCE report on Friday showing inflation remained in check set off another spike in prices and the major averages went into the weekend on a high note led by strength in the Dow Jones and Russell 2000. Interest rates eased lower for the period with the yield on the 10-year Treasury landing at 4.198% and the two -year T-Bill at 4.396%, a five-month low. Lower rates gave a boost to homebuilders with the US Home Construction ETF (ITB) posting a new record high on Friday. Crude oil prices dipped back below $80 a barrel on hopes for a Gaza ceasefire and concerns of demand from China's economy, closing the week at $76.75 a barrel. The sectors finished the week mixed with Utilities (XLU), Healthcare (XLV), Materials (XLB) and Financial (XLF) outperforming, while Consumer Discretionary (XLY), Technology (XLK) and Communication Services (XLC) were laggards off the rotation out of the Magnificent 7. The different indexes managed to pull out a mixed finish for the period with the DJIA up for a fourth consecutive week and Russell 2000 up for a third straight. Next week, the July FOMC Meeting kicks off on Tuesday with the Fed's announcement on rates and Fed Chair Jerome Powell's Wednesday afternoon press conference. While it's unlikely the Federal Reserve will move on rates, investors are hoping Powell & Co. will signal that the doors open for a first cut in September.

For the period, the DJIA extended its weekly win streak to four gaining 301.81 points (+0.7%) and settled at 40589.34. The S&P 500 lost 45.90 points (-0.8%) and closed at 5459.10. The NASDAQ dropped 369.06 points (-2.1%) finishing at 17357.88, while the small cap Russell 2000 traded higher for a third consecutive week adding 75.67 points (+3.5%) and settled at 2260.07.

Market Outlook: The technical condition of the market deteriorated this week despite the different indexes finished mixed. The technical indicators for the S&P 500 and NASDAQ remain weak with MACD, a short-term trend gauge, bearish and Momentum, as measured by the 14-day RSI, negative. The DJIA and Russell 2000 indicators are neutral to bullish and both indexes have worked off their recent overbought conditions. Both indices appear to be benefiting from the rotation into cyclical, value and small cap stocks. The S&P 500 and NASDAQ are being weighed down by the rotation out of mega cap tech shares and have struggled to hold support. The S&P 500 retraced 38.2% of its April to July rally and as of Friday was struggling to hold support at its 50-day MA. The NASDAQ retraced 50% of the April-July run on Thursday and failed to hold support at its 50-day MA. Secondary support would come in around 16820-16830, its 100-day MA if the index moves lower again next week. After surging +41% since the start of the year and +88% off the November low, the Philadelphia Semiconductor Index is down -17.2% from its high of two weeks ago and trying to hold support at its 100-day MA. In addition, that pullback represented a 38.2% retracement of the rally from November to July and is a support level watched by technical traders. It would be a plus for the broader market if we could see the semiconductor index hold this area over the next few weeks.  Finally, the Consumer Discretionary (XLY), Technology (XLK) and Communication Services (XLC) sectors, which contain the Magnificent 7 and other mega cap stocks all traded down to their respective 100-day MA and this week held that support area, a positive going forward. Investors need to keep a close eye on these technical levels as a break below would trigger more selling across the broader market. 

Underlying breadth continues to confirm market rotation. The NYSE and NASDASQ Advance/Decline lines, a leading indicator of market direction, nudged higher showing the majority of stocks remain under accumulation despite weakness in the headline numbers. The NYSE A/D hit a new record high on Friday which is a plus going forward. Furthermore, new highs are exceeding the new lows even on days where the major averages are trading sharply lower.

While investor sentiment remains overly bullish, the market volatility over the last two weeks has shaken out some of the bulls, especially retail investors. The American Association of Individual Investors (AAII) reports a drop from 52.7% to 43.2% in retail bulls, the lowest in a month. We've also seen less exposure to equities by the professionals as the National Association of Active Investment Managers (NAAIM) Exposure Survey has fallen to 76.7% from 103.7% three weeks ago.

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 -4, down a notch from the previous week. Cycles D and E are bullish, while Cycles A, B and C are bearish. The CTI is projected to remain in a negative configuration into September. 

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 Neutral at +0, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2371 units while the number of new 52-week highs exceeded the number of new lows on each day. Breadth was also positive at the NASDAQ as the A/D line added 2774 units while the number of new highs out did the new lows on five days. Finally, the percentage of stocks above their 50-day moving average fell to 62.1% vs. 69.7% the previous week, while those above their 200-day moving average eased to 68.9% vs. 70.4% 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 -4, up two notches 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 07/19/2024 (DJIA - 40287.53). 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 (66) What's Not (25). Of the 91 Industry Groups that we track, 66 are rated as either Strong or Improving while 25 are regarded as Weak or Deteriorating. The previous week's totals were 68-23. The following are the strongest and weakest groups for the period ending 07/25/24. Strongest: Savings & Loans, Paper Products, Banks-Southern and Banks-Eastern. Weakest: Household Products-Durable, Aluminum, Metals Non-Ferrous and Diversified Mining. 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 07/25/24 were: Shorts (+1.92%), Specialty Health (+1.87%), Blend-Small Cap (+1.28%), Growth-Small Cap (+0.74%) and Value-Small Cap (+0.62%). The weakest categories were: Specialty Technology (-5.88%), Commodity-Precious Metals (-3.93%), Commodity-Base Metals (-3.83%), Sector-Telecom (-3.72%) and Specialty Communications (-3.72%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT