Stocks Slammed on New Covid Concerns

Market Letter (Weekly)

December 3, 2021

Global markets were battered this week as investors juggled rising inflation, tightening monetary policy and the spread of a new Covid variant that could lead to more travel restrictions and shutdowns. Equities were on a roller coaster ride as the DJIA tumbled 1113.90 points (-3.17%) over a two-day period before surging 617.75 points (+1.82%) on Thursday, only to trade lower again on Friday. Economic data was mixed with manufacturing and jobs data disappointing, while Services PMI and Factory Orders came in ahead of estimates. Despite testimony by Fed Chair Jerome Powell this week that the Federal Reserve was ready to increase the tapering of assets, yields nudged lower on fears that global growth was slowing, and the 10-year Treasury rate closed at 1.36%, a 10-week low, while the 30-year yield ended at 1.68%. That's the lowest rate in a year, narrowing the yield curve. Crude oil prices also took a dive on demand concerns falling to a three-month low. Selling in equities were led down by losses in  Communication Services (XLC), Consumer Discretionary (XLY), Financials (XLF) and Materials (XLB). Defensive sectors Utilities (XLU) and REITs (XLRE) were the only sectors that managed to post marginal gains. Investors also trimmed positions in big cap technology and the FANG names which exasperated losses in the NASDAQ and NASDAQ 100. The Technology (XLK) sector ETF dropped -1.65% on Friday. The major averages failed to hold key moving average (MA) support levels during the week but were able to crawl back above secondary support areas. Market participants remained cautious amid a lack of news on the Omicron variant, instead choosing to take a wait-and-see stand. The volatile week finished with the DJIA and Russell 2000 lower for a fourth consecutive week, while the S&P 500 and NASDAQ fell for a second straight week and three of the last four.

For the period, the DJIA was down 319.26 points (-0.9%) and settled at 34580.08. The S&P 500 lost 56.19 points (-1.2%) and closed at 4538.43. The NASDAQ dropped 406.19 points (-2.6%) finishing at 15085.47, while the small cap Russell 2000 was the weakest index down 86.63 points (-3.9%), finishing at 2159.31.

Market Outlook:  The technical condition of the market deteriorated this week as the major averages all finished the period with substantial losses. The technical indicators are firmly in negative territory with trend and momentum gauges bearish. Key moving average (MA) support levels were broken but several of the indexes were able to hold secondary support areas. The DJIA broke below its 200-day MA but managed to crawl back above that level as the period ended. The S&P 500 traded below its 50-day MA but was able to find support at its 100-day MA, while the NASDAQ dropped below its 50 and 100-day MA's on Friday but closed on its 100-day MA. The small cap Russell 2000 was one of the weakest indexes sliding below its 200-day MA and falling back to the lower end of its trading range that had been in place since February. the Philadelphia Semiconductor Index (SOX) showed positive divergence and was able to post a gain of +1.3%. The major averages did finish the week very oversold by several measures and we're likely to see relief rallies next week as volatility stays elevated. Stochastics are in the single digits for the different indexes, while the Market Edge/S&P Short Range Oscillator (SRO) closed the period at -7.75%, one of the lowest levels since March 2020. Historically a level below -7% has indicated that a selloff is overdone and that we could be at or near a bottom. In addition, the VIX in the mid-30's usually indicates that we're near a climactic bottom. Several of the different sector ETFs are correcting and are now trading below their 50-day MA including Consumer Staples (XLP), Energy (XLE), Financials (XLF) and Healthcare (XLV), with Communication Services (XLC) and Industrials (XLI) below their 200-day MA. Underlying breadth, which has been showing negative divergence for weeks, continues to deteriorate with the NYSE and NASDAQ Advance/Decline lines showing the majority of stocks are under distribution. The A/D lines have been moving lower since the first week of November. In addition, new 52-week lows have outpaced new highs for several weeks. Bullish Investor Sentiment however, is finally being reined in. While hedge funds are still somewhat bullish on the market, the retail investor has moved to the sidelines. The American Association of Individual Investors (AAII) survey dropped to only 26.7% bulls this week. That's down from 48% just three weeks ago.

While it is too early to discount a year-end rally, the market is certainly facing some headwinds. Besides the uncertainty of what the Omicron variant might hold for global economies, investors will be anxiously looking ahead to the December FOMC Meeting. Fed Chair Jerome Powell said earlier this week that the Central Bank would look to unwind its asset purchases at a quicker pace to battle inflation concerns which could also weigh on stocks. The major averages stumbled into December and CNBC reports this is the worst start to the month in 20-years. Despite the market being oversold, investors may want to remain cautious and stay on the sidelines over the near-term. After all, according to the Stock Trader's Almanac, the Santa rally doesn't officially get underway until the last five days of the year and the first two in January.

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 Neutral at +0, down a notch from the previous week. Cycles C, D and E are bullish, while Cycles A and B are bearish. The CTI is projected to reset to a positive configuration over the next week or two.

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 -1, down three notches from the previous week. Breadth was negative at the NYSE as the Advance/Decline line lost 2966 units while the number of new 52-week lows exceeded the number of new highs on all five sessions. Breadth was also negative at the NASDAQ as the A/D line declined 6156 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 fell to 48.1% vs. 55.1% the previous week, while those above their 200-day moving average slipped to 52.2% vs. 57.2%. 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. The Sentiment Index is Positive at +4, up five notches from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 12/01/21 shows inflows of $13 billion. 

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 (53) What's Not (38). Of the 91 Industry Groups that we track, 53 are rated as either Strong or Improving while 38 are regarded as Weak or Deteriorating. The previous week's totals were 69-22. The following are the strongest and weakest groups for the period ending 12/02/21. Strongest: Auto Manufacturing, Semiconductors & Related, Building Materials and Advertising. Weakest: Medical/Bio Technology, Other Recreation, Internet-Software and Health Care Products. To review all of the Industry Group rankings click on the Industries tab.
ETF Center: The top performing ETF categories for the week ending 12/02/21 were:  Bond-International (+1.44%), International-Emerging (+1.04%), Bond-Government Long Term (+1.01%), Shorts (+0.73%) and Bond-corporate High Yield (+0.61%). The weakest categories were: Commodity-Energy (-5.75%), Sector-Alternative Energy (-2.46%),  Sector-Internet (-4.59%), Commodity-Blend (-2.99%) and Blend-Small Cap (-2.75%).
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):     0   1   Neutral
Momentum Index:     -1   2   Neutral
Sentiment Index:     4   -1   Positive
Strength Index - DJIA (DIA):     76.4   82.8   Positive
Strength Index - NASDAQ 100 (QQQ):   67.8   71.3   Positive
Strength Index - S&P 100 (OEX):     70.2   75.3   Positive
Dow Jones Industrial Average (DJIA): 34580.08   34899.34   -0.9%
S&P 500 Index:   4538.43   4594.62   -1.2%
NASDAQ Composite Index:   15085.47   15491.66   -2.6%
 *Connotation is Positive or Negative Divergence from the DJIA      
Momentum Index Components   Current Reading Prior Week Connotation
*Dow Jones Industrial Averages (DJIA): 34580.08 34899.34    
*DJ Transportation Ave 15967.24 16215.65   Positive
*S&P 500 Index 4538.43 4594.62   Positive
*NYSE Composite Index 16347.87 16624.87   Negative
*NYSE Advance - Decline Line 521831 524797   Negative
*10 Day MA Advance - Decline Line 0.67 0.69   Negative
*NDX 100 Index 15712.04 16025.58   Positive
*NASDAQ Composite Index 15085.47 15491.66   Positive
*DJ Utilities Index 914.03 906.95   Negative
*Russell 2000     2159.31 2245.94   Negative
Trin - 5 Day Average 1.41 1.04   Negative
NYSE Weekly New Highs - New Lows  225-341 348-213   Negative
Zweig Breadth Indicator 0.27 0.14   Negative
McClellan Oscillator 219 234   Negative
McClellan Summation Index 428 1558   Positive
Unchanged Issue Index 0.04 0.03   Negative
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index - 5 Day Average 30.60 66.80   Neutral
Shares Sold Short NYSE - Monthly (000) 14080879 14322298    
NYSE Short Interest Ratio - NYSE Only 2.9 2.6   Bullish
Shares Sold Short NASDAQ  - Monthly (000) 10791146 11284426    
NASDAQ Short Interest Ratio 1.9 2.6   Bearish
AAII Bull-Bear Ratio 0.6 0.9   Bullish
Put/Call Ratio - 5 Day Avg All Equity Options 1.02 0.89   Neutral
Dividend Yield Spread 0.06 -0.06   Bullish
NAAIM Exposure Index 87.9 103.1   Neutral
Bullish Investment Advisors 49.4 56.6   Neutral
Bearish Investment Advisors 24.7 21.7   Neutral
Bullish - Bearish Investment Advisors Ratio 2.0 2.6   Neutral
VIX - CBOE Volatility Index 30.67 28.62   Bullish

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Market Posture Cyclical Trend Index
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Market Recap - 12/03/2021

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 15085.47 -295.85 -1.92% 17.05%
DJ UTILITIES 914.03 9.93 1.1% 5.71%
DJ TRANSPORT 15967.24 18.01 0.11% 27.67%
DJ INDUSTRIALS 34580.08 -59.71 -0.17% 12.98%
NYSE COMPOSITE 16347.87 -127.38 -0.77% 12.55%
S & P 100 INDEX 2095.32 -20.01 -0.95% 21.79%
RUSSELL 2000 2159.31 -47.02 -2.13% 9.34%
S&P 500 4538.43 -38.67 -0.84% 20.83%
CBOE MKT VOLATILITY 30.67 2.92 10.52% 34.81%
AMEX COMPOSITE 3325.11 -43.37 -1.29% 40.84%
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