January 2, 2026

A second straight short and slow holiday week saw the major averages end lower with the DJIA on a four-day losing streak as 2026 rolled out. The Santa rally that looked in place the prior week disappeared early in the period as investors cashed in their gold and silver stocks after parabolic moves and rotated out of AI-related shares. Stocks slipped lower again on Tuesday after the FOMC Meeting minutes were released showing committee members were in no hurry to cut rates further in early 2026 unless inflation comes down. The rate on the 10-year Treasury closed at 4.194%. Tax loss selling kept pressure on the different indexes on Wednesday after better-than-expected jobless claims led to a tick higher in yields. The selloff was across the board with every sector fractionally lower leaving the major averages red on the week. While Energy (XLE), Utilities (XLU) and Industrial (XLI) were able to post positive, the majority of the market groups finished lower with Consumer Discretionary (XLY), Technology (XLK) and Financial (XLF) the weakest market groups. A surge in semiconductors on Friday trimmed the losses for the period as buying in Advanced Micro Devices (AMD), Lam Research (LRCX), Micron Technologies (MU) and Intel (INTC) sent the Philadelphia Semiconductor Index up +4.01% on the day and positive for the week but it wasn't enough to send the major averages into positive territory for the period. Next week, Wall Street will be back in full force with Monday the last chance for a Santa rally to appear, but it doesn't look promising. After that, look for government economic data to be released on December jobs and inflation that will put the focus on when we're likely to see additional rate cuts in 2026.

For the period, the DJIA lost 328.58 points (-0.7%) and settled at 48382.39. The S&P 500 fell 71.47 points (-1.0%) and closed at 6858.47. The NASDAQ dropped 347.47 points (-1.5%) finishing at 23,235.63, while the small cap Russell 2000 slid 26.13 points (-1.0%) and settled at 2508.22.

Market Outlook: The technical condition of the market deteriorated slightly this week as the major averages retreated from recent highs and the Market Edge Momentum Index slipped to a neutral reading. The technical indicators for the different indexes eased into neutral ground with MACD, a short-term trend gauge, on the DJIA posting a bearish cross. Momentum, as measured by the 14-day RSI was neutral and slowing. Most of the major averages continued to hold above support at their respective 50-day MA until Friday when we saw the NASDAQ slip below that level. Although the Philadelphia Semiconductor Index (SOX) outperformed, up +2.2%, the DJ Transportation Index continued to consolidate gains from its recent breakout. While momentum remains positive for the transports, MACD now shows a bearish trend. The small cap Russell 2000 was on a four-day losing streak and flirting with its 50-day MA before getting a lift on Friday but underperformed. Finally, the VIX, Volatility Index, which measures how concerned traders are of possible weakness in the market, fell to its lowest level, 13.47, since December 2024 the previous week. Although it inched higher this week, that indicates that market participants aren't expecting more of a selloff as we enter the New Year. However, with the number of bullish calls from analysts, it could be a sign of complacency that could catch traders off guard if stocks hit a bump in the road.

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 +7, down two notches from the previous week. Cycles B, C and D are bullish, while Cycles and E are bearish. The CTI is projected to remain in a positive configuration through January.

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 +2, down two notches from the previous week. Breadth was mixed at the NYSE as the Advance/Decline line lost 1153 units while the number of new 52-week highs exceeded the number of new lows on three of the four sessions. Breadth was negative at the NASDAQ as the A/D line dropped 3583 units while the number of new lows out did the new highs on four days. Finally, the percentage of stocks above their 50-day moving average fell to 49.5% vs. 58.4% the previous week, while those above their 200-day moving average eased to 63.3% vs. 66.1% prior. Readings above 70.0% denote an overbought condition, while below 20% is bullish.

Underlying market breadth was mixed this week with the NYSE and NASDAQ Advance/Declines lines, leading indicators of market direction, both losing ground. However, the NYSE A/D is coming off a new high hit last week that still indicates the majority of stocks are under accumulation and implies the different indexes should regain firmer footing over the near-term.  Although new 52-week highs continue to outnumber the new lows on the NYSE, the new lows on the NASDAQ expanded and outdid the new highs for a third consecutive week.

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 -7 down two notches from the previous week.

Investor sentiment is getting overly bullish with the Market Edge Sentiment Index reaching -7, its worse level since December 2024. The American Association of Individual Investors (AAII) showed retail bulls rose to 42%, above the historical average of 37.5%, while The National Association of Active Investment Managers (NAAIM) Exposure Index shows the professionals above the 90% level for a fifth consecutive week at 92.9%. In addition, a recent report from Bloomberg said every Wall Street analyst now predict a fourth straight year of market gains, the longest win streak in nearly 20 years! Contrarian investors will take note that when the consensus is heavily slanted towards one side, it might be time to consider the other side remembering Fed Chair Alan Greenspan's call of 'Irrational Exuberance' back in the 1990's.

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Bullish as of the week ending 11/28/2025 (DJIA - 47716.42). 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 (7) - What's Not (23): The following are the strongest and weakest Industry Groups for the period ending 1/01/26. Strongest: Transportation, Integrated Oil & Gas, Metals & Mining and Banking. Weakest: Building Materials, Wholesale, Technology Services and Food, Beverage & Tobacco. 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 1/01/26 were: Commodity-Base Metals (+2.64%), Shorts (+0.53%) and Bond-Corporate High Yield (+0.21%). The weakest categories were: Commodity-Precious Metals (-3.53%), Sector-Alternative Energy (-3.05%), Blend-Small Cap (-2.59%), Sector-Basic Materials (-2.53%) and Specialty Natural Resources (-2.43%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT