May 27, 2022

The S&P 500 and NASDAQ brought an end to their seven-week losing streaks as they closed out the week on a high note. The DJIA finally snapped its eight-week losing streak, the longest since 1923, as it put together a six-day win streak as investors took their cue from the Federal Reserve and bought up beaten down equities. Buying in banking stocks got the week off to a solid start as JP Morgan (JPM) CEO Jamie Dimon raised guidance and Warren Buffett's Berkshire Hathaway (BRK.B) bought shares of Citigroup (C) sending the Financial (XLF) sector +3.2% higher. Mondy's bounce picked up steam in the afternoon and the Dow Jones was able to tack on 618.34 points (+1.98%) with every sector green. Weak economic data and a profit warning from social media provider SNAP Inc (SNAP) lit up the sell signs on Tuesday and the major averages sank at the open. While technology shares ended the session sharply lower after SNAP's -43% tumble, the DJIA erased a 500-point drop to finish in the plus column. The Federal Reserve was able to stop the bleeding midweek as the FOMC Meeting Minutes showed the Committee limiting policy to a 0.50-point rate hike in June and July to battle inflation. That helped investors scale back rate econcerns and the market rallied Thursday and Friday in another broad-based run with every sector posting positive. Yields nudged lower with the rate on the 10-year Treasury landing at 2.72%. Crude oil prices traded higher as Europe prepared to wean itself off Russian oil and the US prepped for the summer driving season. As mentioned, the rally was across the board led by a 9.51% spike in the Consumer Discretionary (XLY) sector and a 8.27% jump in Energy (XLE). Technology (XLK), Financials (XLF) and Industrials (XLI) soared more than 7%. As the week came to a close, the major averages were looking at their best weekly percentage gain of the year.

For the period, the DJIA tacked on 1951.06 points (+6.2%) and settled at 33212.96. The S&P 500 added 256.88 points (+6.6%) and closed at 4158.24. The NASDAQ jumped 776.51 points (+6.8%) finishing at 12131.13. The small cap Russell 2000 picked up 114.63 points (+6.5%), finishing at 1887.90.

Market Outlook: The technical condition of the market improved this week as the major averages traded sharply higher for the first time in eight weeks. The technical indicators moved back into neutral to positive territory with MACD, a short-term trend gauge, crossing into bullish ground and Momentum, as measured by the 14-day RSI, positive and gaining strength. The DJIA and S&P 500 were able to climb back above their respective 100-week moving average (MA) which is a positive going forward. In addition, the major averages were able to trade through downward sloping trend lines off the May-April highs. The DJIA is the first index to retrace 38.2% of the January to May selloff and opens the door for a move to 33800, a 50% retracement of the same period. Furthermore, the S&P 500 was able to bounce off support at its 38.2% retracement level of the March 2020 low to the January 2022 high, which also implies that we may have seen a near-term bottom. The DJIA showed positive divergence and never traded down to that support area. Finally, market technicians prefer to see secondary indexes lead the market higher, and lower, and this week the DJ Transportation Index and Philadelphia Semiconductor Index outperformed, while the small cap Russell 2000 kept pace with the broader market which also hints that we could see further upside over the coming weeks. The Philadelphia Semiconductor Index traded up to its 50-day MA on Friday before hitting resistance. Underlying breadth was also positive with the NYSE and NASDAQ Advance/Decline lines showing the rally was broad-based with most stocks under accumulation, while the NYSE registered two-days of more new 52-week highs than lows for the first time since early April. Investor sentiment remains overly bearish but there were some positive signs that we're coming off a bottom. While the Percentage of Bullish Advisors (28.2%) and bullish American Association of Individual Investors (AAII) (19.8) are at levels seen in March 2020, there was an uptick in equity exposure by professionals with the National Association of Active Investment Managers (NAAIM) increasing to 33.2%.

Although we never got what traders refer to as a washout bottom, last week's low certainly had characteristics of selling exhaustion. The difference is that in a washout bottom, investors have thrown in the towel, stocks reach extreme oversold levels, and the bulls rush in sending stocks sharply higher on double or triple average volume. An exhaustion bottom is a level where investors aren't anxious to jump 'all in', but selling has dried up, volume is below average as investors remain hesitant to buy. While I'm not calling for an end to a bear market, I do think valuations are attractive enough that one can find great stocks at cheap prices. This week's confirmation from the Federal Reserve of expectations for two 0.50-point hikes seemed to satisfy investors that the Fed may show some restraint and not raise rates too far, too fast. That brought stocks off oversold levels and after months of selling pressure, the stock market looks overdue for a summer rally while we wait for signs that inflation is tapering off. However, I remain cautious and see limited upside and more bumps in the road unless we see an end to China's Covid lockdowns or a ceasefire in the Ukraine conflict. Upside targets for the major averages will be in next week's Market Letter. 

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 +12, up 11 notches from the previous week. Cycles A, B, C, D and E are bullish. The CTI is expected to remain positive until August.

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 Positive at +6, up 12 notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 7292 units while the number of new 52-week lows exceeded the number of new highs on three sessions. Breadth was also mixed at the NASDAQ as the A/D line added 5838 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 jumped to 32.4% vs. 19.4% the previous week, while those above their 200-day moving average increased to 25.9% vs. 20.5%. 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 +5, down two notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 5/25/22 shows inflows of $5.2 billion. That's the first inflow in seven weeks.

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 5/27/2022 (DJIA - 33212.96). 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 (35) What's Not (56). Of the 91 Industry Groups that we track, 35 are rated as either Strong or Improving while 56 are regarded as Weak or Deteriorating. The previous week's totals were 32-59. The following are the strongest and weakest groups for the period ending 5/26/22. Strongest: Oil-Secondary, Oilfield-Integrated Majors, Oilfield-Equipment and Tobacco. Weakest: Banks-Eastern, Savings & Loans, Media-Publishing and Casinos. 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 5/26/22 were: Sector-Financial (+8.30%), Sector-Energy (+7.92%), Specialty Retail (+6.38%), Sector-Consumer Discretionary (+5.47%) and Blend-Small Cap (+5.72%). The weakest categories were: Shorts (-8.05%), Commodity-Base Metals (-0.55%), Sector-Internet (-0.34%) and Commodity-Agriculture (-0.16%).  To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT