Market Rallies on Debt Ceiling Deal

Market Letter (Weekly)

June 2, 2023

Equities kicked off the month of June on a high note on the backs of a debt ceiling deal, expectations for the Federal Reserve to hold the line on rates at the June FOMC meeting and better than expected jobs numbers that dowsed fears of a recession. Investors fretted that a strong showing in new payrolls would trigger another hike in rates early in the week, but comments from Fed officials midweek that a pause was likely at the next FOMC meeting helped send the different indexes sharply higher ahead of the weekend. The rally saw a broadening out of underlying breadth with every sector finishing in positive territory. Defensive sectors Utilities (XLU) and Consumer Staples (XLP) were the laggards, while the gains were led by strength in Consumer Discretionary (XLY), Materials (XLB), REITs (XLRE), Industrials (XLI) and Healthcare (XLV). The S&P 500 had its sites on the highs from August 2022, while the NASDAQ, which extended its weekly win streak to six, hit a 13-month intraday high on Friday. After ending May lower on the month the DJIA and small cap Russell 2000 played some catch-up ball and the DJIA was able to push back into the plus column for the year on Friday. Despite a bump higher in yields on Friday, rates moved lower during the period with the 10-year Treasury closing at 3.70% and the two-year T-Bill landing at 4.50%. Crude oil prices traded below $70 a barrel for much of the week but ticked higher ahead of an OPEC+ meeting this weekend where production cuts could be on the table. A rotation into more cyclical stocks this week left the DJIA, S&P 500 and NASDAQ all higher across the board for the first time in three weeks as the bulls looked ready for a run.
For the period, the DJIA gained 668.42 points (+2.0%) and settled at 33762.76. The S&P 500 added 76.92 points (+1.8%) and closed at 4282.37. The NASDAQ jumped 265.08 points (+2.0%) finishing at 13240.77, while the small cap Russell 2000 picked up 57.88 points (+3.3%) finishing at 1830.90.

Market Outlook: The technical condition of the market improved this week as the major averages closed the period higher on broadening leadership. The technical indicators are in bullish ground with MACD, a short-term trend gauge, and Momentum, as measured by the 14-day RSI, strong. However, the NASDAQ, NASDAQ 100 and Philadelphia Semiconductor Index finished overbought with the NASDAQ 100 and Philadelphia Semiconductor Index the most overbought they have been since November 2021 when the index's topped out. The NASDAQ's performance in May diverged from the DJIA the most in more than 30+ years which should lead to some back and forth trading over the near-term. Some choppy consolidation in the NASDAQ and big cap tech would be healthy for the overall market going forward. The major averages are now trading back above key moving average resistance levels with the DJIA breaking back above its 50 and 100-day MA's this week. In addition, the small cap Russell 2000 and DJ Transportation Index, which have been showing negative divergence for weeks, were able to cross above resistance at their 50 and 200-day MA's, though both remain below their respective 100-day MA. If we see the growth trade take a pause, a rotation into small caps would support the different indexes going forward. With the breakout in the S&P 500 this week, further upside looks probable with 4300-4325 the next likely target for the bellwether index. That would represent a 61.8% retracement of the January 2022-October 2022 selloff and coincides with the April 2022 high. The NASDAQ has retraced 50% of its bear market selloff and a 61.8% retracement comes into play around 13900. The DJIA is trading just below its 61.8% retracement and targets 33900-33950.
Underlying breadth has been a concern and pointed to a weak and unsustainable rally if breadth didn't broaden out. This negative divergence kept me cautious on the market, but this week we finally saw a broadening in breadth that should help boost prices higher, if it continues. Both the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, moved higher, while we saw the number of new 52-week lows begin to contract with the NASDAQ putting up more new highs than lows on Friday for the first time in two weeks. Investor sentiment remains neutral but there was an uptick in bullishness in both retail and the professionals for a third consecutive week. In addition, the VIX, a volatility index that measures fear in the market fell to its lowest level since July 2021 meaning traders don't see a lot of downside risk in the market here.

This week a trifecta of uncertainty was removed from the market which could signal the start of a summer rally. A passing of the debt ceiling, a likely pause in the tightening of policy by the Fed and economic data that shows slower growth but a resilient jobs market that could fend away a recession. Equities rallied on the news, but investors may still want to practice some restraint before going all in. Inflation is proving to be stickier than hoped for, and with the consumer staying stronger than expected, the Federal Reserve could find itself in a position where it needs to apply more pressure on the economy later in the year to get inflation down to its target of 2%. As of Friday, the CME Group FedWatch shows a 67% probability of another rate hike in July. That could be more than the Bull can handle as the summer heats up.

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 -1, unchanged from the previous week. Cycles A, B and D are bullish, while Cycles C and E are bearish. The CTI is projected to remain in a negative configuration into July. 

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 +0, up two notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line gained 2694 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 2222 units while the number of new lows out did the new highs on three of the four sessions. Finally, the percentage of stocks above their 50-day moving average rose to 38.6% vs. 35.6% the previous week, while those above their 200-day moving average increased to 42.5% vs. 39.0%. 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 +0, down a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 5/31/23 shows inflows of $2.2 billion. That's the first inflow in six weeks.

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bearish as of the week ending 5/26/2023 (DJIA - 33093.34). 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 (47) What's Not (44). Of the 91 Industry Groups that we track, 47 are rated as either Strong or Improving while 44 are regarded as Weak or Deteriorating. The previous week's totals were 51-40. The following are the strongest and weakest groups for the period ending 6/01/23. Strongest: Semiconductors & Related, Advertising, Pharmaceuticals and Building Materials. Weakest: Media-Cable Broadcasting, Retailers- Apparel, Banks-Western and Banks-Southern. 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 6/01/23 were: Specialty Technology (+8.46%), Sector-Internet (+3.75%), Growth-Large Cap (+3.24%), Specialty Communications (+2.30%) and Sector-Telecom (+2.30%). The weakest categories were: Commodity-Energy (-5.48%), Sector-Energy (-4.05%), Specialty Retail (-1.75%), Commodity-Blend (-1.50%) and Sector-Consumer Staples (-1.47%). 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):     -1   -1   Negative
Momentum Index:     0   -2   Neutral
Sentiment Index:     0   1   Neutral
Strength Index - DJIA (DIA):     51.9   51.1   Positive
Strength Index - NASDAQ 100 (QQQ):     67.9   64.2   Positive
Strength Index - S&P 100 (OEX):     67.1   59.3   Positive
Dow Jones Industrial Average (DJIA): 33762.76   33094.34   2.0%
S&P 500 Index:   4282.37   4205.45   1.8%
NASDAQ Composite Index:       13240.77   12975.69   2.0%
*Connotation is Positive or Negative Divergence from the DJIA  
Momentum Index Components Current Reading Prior Week Connotation
*Dow Jones Industrial Averages (DJIA): 33762.76 33094.34    
*DJ Transportation Average 14150.48 13903.42   Negative
*S&P 500 Index 4282.37 4205.45   Positive
*NYSE Composite Index 15345.19 15078.69   Negative
*NYSE Advance - Decline Line 510421 507522   Negative
*10 Day MA Advance - Decline Line 1.06 0.96   Positive
*NDX 100 Index 14546.64 14298.41   Positive
*NASDAQ Composite Index 13240.77 12975.69   Positive
*DJ Utilities Index 900.04 893.80   Negative
*Russell 2000       1830.90 1773.02   Positive
Trin - 5 Day Average 1.01 0.91   Neutral
NYSE Weekly New Highs - New Lows  118-214 160-188   Negative
Zweig Breadth Indicator 0.86 0.69   Positive
McClellan Oscillator -129 44   Positive
McClellan Summation Index 574 521   Positive
Unchanged Issue Index 0.02 0.04   Negative
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index - 5 Day Average 65.00 65.40   Neutral
Shares Sold Short NYSE - Monthly (000) 16024015 15911838   Bullish
NYSE Short Interest Ratio - NYSE Only 2.5 2.8   Neutral
Shares Sold Short NASDAQ  - Mo. (000) 12907845 12345232   Bullish
NASDAQ Short Interest Ratio 2.8 2.3   Neutral
AAII Bull-Bear Ratio 1.2 0.7   Neutral
Put/Call Ratio - 5 Day Avg All Equity Options 0.98 1.00   Bearish
Dividend Yield Spread 2.18 2.48   Bullish
NAAIM Exposure Index 53.9 65.5   Neutral
Bullish Investment Advisors 47.9 46.5   Neutral
Bearish Investment Advisors 23.3 24.7   Neutral
Bullish - Bearish Investment Advisors Ratio 2.1 1.9   Neutral
VIX - CBOE Volatility Index 14.60 17.95   Neutral

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Market Posture Cyclical Trend Index
As of: 05/26/2023
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Market Recap - 06/05/2023

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 13229.43 -11.34 -0.09% 26.4%
DJ UTILITIES 904.22 4.18 0.46% -6.53%
DJ TRANSPORT 13989.87 -160.61 -1.14% 4.47%
DJ INDUSTRIALS 33562.86 -199.9 -0.59% 1.25%
NYSE COMPOSITE 15275.21 -69.99 -0.46% 0.6%
S & P 100 INDEX 1997.76 -3.7 -0.18% 16.88%
RUSSELL 2000 1806.71 -24.2 -1.32% 2.58%
S&P 500 4273.79 -8.58 -0.2% 11.31%
CBOE MKT VOLATILITY 14.73 0.13 0.89% -32.03%
AMEX COMPOSITE 3996.51 -41.03 -1.02% -3.36%
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