Stocks Rally on Inflation Dip

Market Letter (Weekly)

August 12, 2022

The stock market struggled to start the week after revenue warnings from semiconductor giants NVIDIA (NVDA) and Micron Technologies (MU). However, better than expected CPI and PPI data later in the week showed a reduction in inflation and the major averages were able to rally into the weekend. The Philadelphia Semiconductor Index dropped more than -6% on Monday and Tuesday throwing fears into investors that the recent rally would stall at key resistance. Market participants were able to shake off the losses as inflation decelerated in July and the different indexes rebounded and were able to climb higher into the weekend. The gains were felt across the board with every sector finishing in the green led by strength in Energy (XLE), Financials (XLF), Materials (XLB), Communication Services (XLC), REITs (XLRE) and Industrials (XLI). Hopes that the Fed's tightening could reduce inflation and not tip the US economy into a recession sent the major averages to their best levels since May and extended the S&P 500 and NASDAQ win streak to a fourth consecutive week. 

For the period, the DJIA gained 957.58 points (+2.9%) and settled at 33761.05. The S&P 500 picked up 13.96 points (+3.3%) and closed at 4280.15. The NASDAQ jumped 389.64 points (+3.1%) finishing at 13047.19. The small cap Russell 2000 outperformed surging 94.80 points (+4.9%), finishing at 2016.62.

Market Outlook: The technical condition of the market improved this week as the major averages were able to bust through previous resistance and close at their highest levels since the first of May. The technical indicators are bullish, but several closed the period overbought. MACD, a short-term trend gauge, shows the different indexes in rally mode, while the 14-day RSI shows momentum is strong. The week ended with stochastics in the high 90's however, hinting that some consolidation in prices should be expected. After clearing the June highs, the major averages closed the week with their respective 200-day moving average in sight, while the small cap Russell 2000 and DJ Transportation Index were able to cross above that key resistance area. The Russell 2000 last closed above its 200-day MA in early January, while the transports last closed above it the first of May. Leadership by the secondary indexes bodes well for the broader market going forward. In addition, the DJIA and S&P 500 have now retraced more than 50% of the January-June selloff. Often when a stock or index is able to retrace more than 50% of a selloff, it will take a run at its old high. Despite the more than 20% rally off the June lows for the NASDAQ, the tech heavy index remains below that key resistance level. Finally, this week the different indexes were able to break the bearish pattern of lower highs and lower lows by advancing above the June highs, another bullish signal for investors. Underlying breadth remains positive with the NYSE and NASDAQ Advance/Decline lines higher for a fourth consecutive week showing broad participation in the current rally and across all sectors. In addition, the number of new 52-week highs outnumbered new lows for the first time in nine weeks on the NYSE and 37 weeks for the NASDAQ. That was the first week of November 2021! Investor Sentiment is in neutral ground after weeks of being overly bearish. The American Association of Individual Investors (AAII) survey shows retail bulls and bears are just about even, while the National Association of Active Investment Managers (NAAIM) Exposure Index shows the professionals have upped their equity exposure to 71.6%. Lastly, the VIX closed the period back below 20 indicating traders are comfortable with current price levels.

Investors cheered inflation's downtick from historical levels this week, hoping it might slow the Federal Reserve's aggressive tightening cycle. Indeed, the CME Group FedWatch saw the chance of the Fed raising rates 0.75-point in September fell from a 68.5% chance last Friday to only 42.5%. Treasury yields dipped helping send equities sharply higher, but the yield curve remained inverted implying that bond investors still have a recession in play, which could yet be a drag on stocks. While a recession could still be in the cards, the rally off the June lows shows investors think the Federal Reserve could pull off a soft landing, or, at worst, a shallow recession. The strength of technical analysis is that it measures internal and underlying conditions of the market to determine whether the odds are supportive of a move higher or lower in the market. A slowdown or recession is still in play for the economy, but don't discount this move in stocks yet. Broad based positive breadth in the current stock rally says this bull still has room to run. How far, however, remains to be seen.

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 +4, unchanged from the previous week. Cycles A, B, C and E are bullish, while Cycle D is bearish. The CTI is projected to remain positive into 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 +9, up a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 4946 units while the number of new 52-week highs exceeded the number of new lows on four sessions. Breadth was also positive at the NASDAQ as the A/D line added 4408 units while the number of new highs out did the new lows on three of the five days. Finally, the percentage of stocks above their 50-day moving average increased to 75.8% vs. 69.3% the previous week, while those above their 200-day moving average rose to 34.1% vs. 27.4%. 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 Neutral at +1, unchanged from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 8/10/22 shows inflows of $4.4 billion. 

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 6/24/2022 (DJIA - 31500.68). 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 (80) What's Not (11). Of the 91 Industry Groups that we track, 80 are rated as either Strong or Improving while 11 are regarded as Weak or Deteriorating. The previous week's totals were 77-14. The following are the strongest and weakest groups for the period ending 8/11/22. Strongest: Advertising, Communications, Retail-Drug Based and Trucking. Weakest: Internet-Content, Internet-Retail, Oilfield Equipment and Automobile Parts. 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 8/11/22 were: Commodity-Energy (+7.29%), Sector-Energy (+6.84%), Specialty Financial (+5.33%), Commodity-Blend (+5.13%) and Specialty Natural Resources (+4.99%). The weakest categories were: Shorts (-5.75%) and Bond-Government Long Term (-1.36%). 
To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT


Market Timing Models   Current Reading Prior Week Connotation
Cyclical Trend Index (CTI):     4   4   Positive
Momentum Index:     9   8   Positive
Sentiment Index:     1   1   Neutral
Strength Index - DJIA (DIA):     62.1   55.2   Positive
Strength Index - NASDAQ 100 (QQQ):     69.6   67.4   Positive
Strength Index - S&P 100 (OEX):     64.1   56.5   Positive
Dow Jones Industrial Average (DJIA):   33761.05   32803.47   2.9%
S&P 500 Index:   4280.15   4145.19   3.3%
NASDAQ Composite Index:   13047.19   12657.55   3.1%
 *Connotation is Positive or Negative Divergence from the DJIA    
Momentum Index Components     Current Reading Prior Week Connotation
*Dow Jones Industrial Averages (DJIA):   33761.05 32803.47    
*DJ Transportation Average     15146.70 14601.05   Positive
*S&P 500 Index 4280.15 4145.19   Positive
*NYSE Composite Index 15804.38 15273.23   Negative
*NYSE Advance - Decline Line 517236 512290   Positive
*10 Day MA Advance - Decline Line 1.45 1.46   Positive
*NDX 100 Index 13565.87 13207.69   Positive
*NASDAQ Composite Index 13047.19 12657.55   Positive
*DJ Utilities Index 1041.56 1013.96   Positive
*Russell 2000     2016.62 1921.82   Positive
Trin - 5 Day Average 0.73 1.01   Positive
NYSE Weekly New Highs - New Lows  109-138 98-173   Positive
Zweig Breadth Indicator 0.81 0.48   Positive
McClellan Oscillator -236 -143   Positive
McClellan Summation Index 3339 2491   Positive
Unchanged Issue Index 0.04 0.05   Negative
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index - 5 Day Average 50.80 42.60   Neutral
Shares Sold Short NYSE - Monthly (000) 16363242 16363242   Neutral
NYSE Short Interest Ratio - NYSE Only 2.7 2.7   Neutral
Shares Sold Short NASDAQ  - Mo (000) 12650179 13058099   Neutral
NASDAQ Short Interest Ratio 2.7 2.7   Neutral
AAII Bull-Bear Ratio 0.9 0.8   Neutral
Put/Call Ratio - 5 Day Avg All Equity Options 1.01 0.99   Neutral
Dividend Yield Spread 1.37 1.56   Bullish
NAAIM Exposure Index 71.6 55.3   Neutral
Bullish Investment Advisors 44.4 `   Neutral
Bearish Investment Advisors 27.8 30.1   Neutral
Bullish - Bearish Investment Advisors Ratio 1.6 1.4   Neutral
VIX - CBOE Volatility Index 19.53 21.15   Neutral

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Market Posture Cyclical Trend Index
As of: 06/24/2022
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Market Recap - 08/16/2022

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 13102.55 -25.5 -0.19% -16.25%
DJ UTILITIES 1053.86 3.24 0.31% 7.45%
DJ TRANSPORT 15209.96 111.48 0.74% -7.7%
DJ INDUSTRIALS 34152.01 239.57 0.71% -6.02%
NYSE COMPOSITE 15846.79 52.46 0.33% -7.67%
S & P 100 INDEX 1966.75 4.3 0.22% -10.38%
RUSSELL 2000 2020.53 -0.82 -0.04% -10.01%
S&P 500 4305.2 8.06 0.19% -9.67%
CBOE MKT VOLATILITY 19.69 -0.26 -1.3% 14.08%
AMEX COMPOSITE 4217.11 39.33 0.94% 23.05%
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