Nvidia Earnings Recharge Bulls

Market Letter (Weekly)

February 23, 2024

Blowout earnings from AI chipmaker Nvidia (NVDA) halted a three-day slide in the NASDAQ and helped boost most of the major averages to new record highs this week, finishing higher on 15 of the last 17 weeks. Investors rotated out of big cap technology shares early in the week as an uptick in yields weighed on growth and small cap stocks, but the Nvidia induced rally erased the losses and the bulls ran into the weekend as traders piled back into stocks. Equities struggled midweek after the release of the FOMC Meeting Minutes confirmed that the Fed was in no hurry to cut rates as traders pushed out hopes for a Fed easing to June, but several Fed officials commented that they were ready to cut rates when the data 'gave the signal'. The yield on the 10-year Treasury traded as high as 4.354% before settling at 4.254%. Thursday's rally sent the DJIA, S&P 500, NASDAQ 100, NYSE and Philadelphia Semiconductor Index to new all-time highs and the NASDAQ briefly joined the party on Friday before a late stumble. The week's gains were across the board led by Consumer Staples (XLP), getting a boost from Walmart's (WMT) earnings, Materials (XLB), Financial (XLF), Industrial (XLI), Healthcare (XLV) and Technology (XLK) which all tacked on gains of more than +1.25%. Energy (XLE) was the weakest market group as crude oil prices ended a three-week sprint. Heading into next week, investors will be focused on Thursday's PCE report, the Fed's preferred inflation gauge, for signs that the inflation bump in January was a one-off, or an indication that inflation is stickier than hoped bringing Fed policy back to the forefront.


For the period, the DJIA added 503.54 points (+1.3%) and settled at 39131.53. The S&P 500 gained 83.23 points (+1.7%) and closed at 5088.80. The NASDAQ jumped 221.17 points (+1.4%) finishing at 15996.82. The small cap Russell 2000 snapped a two-week win streak easing 16.05 points (-0.8%) and settled at 2016.69.


Market Outlook: The technical condition of the market is positive, and the major trend remains bullish as several of the major averages were able to push to new highs this week. The technical indicators remain positive with MACD, a short-term trend gauge, in bullish territory and Momentum, as measured by the 14-day RSI, positive and rising. Despite the positive outlook there are some concerns, but none are signaling anything more than some overdue consolidation after closing higher on 15 of the last 17 weeks. For one, there are several gaps in the charts of the different indexes, both bullish and bearish. Often these gaps will be filled over the following weeks and that could lead to a retest of where the indexes closed on Wednesday, erasing the end of the week spurt. In addition, the major averages finished very overbought on their weekly charts with the 14-week RSI touching the mid-70's on the DJIA and S&P 500, the highest that indicator has reached since January 2021. While a stock or index can stay overbought for some time, it does caution traders that the market is susceptible to a sizeable pullback if we see economic data suggest anything more than a soft landing ahead. However, that is not a reason to sell at this stage. First support levels to watch on any dip will be 38500 for the DJIA, 4950 for the S&P 500 and 15600 for the NASDAQ. 


Underlying breadth was mixed as the run to new highs was on the backs of a narrow group of stocks which sends up the caution flags. The NYSE Advance/Decline line, which is considered a leading indicator of market direction, was able to eke out a small gain, but the NASDAQ A/D line drifted lower and only picked up 350 units on Thursday's surge, again showing a narrowing in participation. New 52-week highs outdid the new lows on the NYSE but were closer to even on the NASDAQ. 


The run to new highs kept Investor Sentiment overly bullish, but this week's volatility could be an indication that the professionals are taking some money off the table. The National Association of Active Investment Managers (NAAIM) Exposure Index fell to a neutral 74.7 after spending two weeks fully invested in the mid 90's. The American Association of Individual Investors (AAII) increased to 44.3% from 42.2% the prior week but remains above the historical average of 37.5%. Finally, we saw a drop to 16.2% in the Percentage of Bearish Investment Advisors which is the fewest bears since the summer of 2021. The Bulls outnumber the Bears 3.5:1 in that survey which also hoists the caution flag. Despite all that bullishness, according to FINRA, margin levels are close to where they were in December and there remains an excess amount of cash on the sidelines which can fuel further gains going forward.


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 -15, unchanged from the previous week. Cycles A, B, C, D and E are bearish. The CTI is projected to remain in a negative configuration into March.


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, unchanged from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 829 units while the number of new 52-week highs exceeded the number of new lows on all four session. Breadth was mixed at the NASDAQ as the A/D line dropped 1723 units while the number of new highs out did the new lows on three of the four days. Finally, the percentage of stocks above their 50-day moving average fell to 56.7% vs. 62.2% the previous week, while those above their 200-day moving average eased to 65.1% vs. 67.5% the prior week. 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 Negative at -5, up two notches from the previous week.


Market Posture: Based on the status of the Market Edge, market timing models, the 'Market Posture' is Bearish as of the week ending 01/05/2024 (DJIA - 37466.11). 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 53-38. The following are the strongest and weakest groups for the period ending 02/22/24. Strongest: Semiconductors & Related, Building Materials, Internet-Software and Pharmaceuticals. Weakest: Savings & Loans, Water Utilities, Media-Cable Broadcasting and  Precious Metals. 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 02/22/24 were: Sector-Energy (+4.05%), Specialty Financial (+3.14%), Europe (+2.95%), International Developed (+2.91%) and Commodity-Energy (+2.74%). The weakest categories were: Sector-Alternative Energy (-6.61%) and Shorts (-2.43%). 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): -15   -15   Negative
Momentum Index: 6   6   Positive
Sentiment Index: -5   -7   Negative
Strength Index - DJIA (DIA): 37.4   35.4   Negative
Strength Index - NASDAQ 100 (QQQ): 36.1   36.2   Negative
Strength Index - S&P 100 (OEX): 37.6   37.2   Negative
Dow Jones Industrial Average (DJIA): 39131.53   38627.99   1.3%
S&P 500 Index: 5088.80   5005.57   1.7%
NASDAQ Composite Index: 15996.82   15775.65   1.4%
*Connotation is Positive or Negative Divergence from the DJIA
Momentum Index Components Current Reading Prior Week Connotation
*Dow Jones Industrial Averages (DJIA): 39131.53 38627.99    
*DJ Transportation Average 15921.02 15629.19   Negative
*S&P 500 Index 5088.80 5005.57   Positive
*NYSE Composite Index 17616.02 17409.30   Positive
*NYSE Advance - Decline Line 527658 526829   Positive
*10 Day MA Advance - Decline Line 1.30 1.22   Positive
*NDX 100 Index 17937.61 17685.98   Positive
*NASDAQ Composite Index 15996.82 15775.65   Positive
*DJ Utilities Index 849.05 844.40   Negative
*Russell 2000 2016.69 2032.74   Positive
Trin - 5 Day Average 1.05 0.94   Neutral
NYSE Weekly New Highs - New Lows  458-81 360-126   Positive
Zweig Breadth Indicator 0.62 0.33   Positive
McClellan Oscillator -38 -40   Neutral
McClellan Summation Index 2905 2864   Positive
Unchanged Issue Index 0.03 0.03   Negative
Sentiment Index Components Current Reading Prior Week Connotation
Fear-Greed Index - 5 Day Average 73.60 74.80   Neutral
Shares Sold Short NYSE - Monthly (000) 15247361 15348228   Neutral
NYSE Short Interest Ratio - NYSE Only 2.6 2.2   Neutral
Shares Sold Short NASDAQ  - Monthly (000) 12543949 12529904   Bullish
NASDAQ Short Interest Ratio 2.3 2.3   Neutral
AAII Bull-Bear Ratio 1.7 1.6   Bearish
Put/Call Ratio - 5 Day Avg All Equity Options 1.02 0.98   Neutral
Dividend Yield Spread -2.04 -1.89   Bearish
NAAIM Exposure Index 74.7 95.6   Neutral
Bullish Investment Advisors 57.3 58.8   Bearish
Bearish Investment Advisors 16.2 17.7   Bearish
Bullish - Bearish Investment Advisors Ratio 3.5 3.3   Bearish
VIX - CBOE Volatility Index 13.75 14.24   Neutral

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Market Posture Cyclical Trend Index
As of: 01/05/2024
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Market Recap - 02/23/2024

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 15996.82 -44.8 -0.28% 6.56%
DJ UTILITIES 849.05 3.14 0.37% -3.7%
DJ TRANSPORT 15921.02 98.65 0.62% 0.14%
DJ INDUSTRIALS 39131.53 62.42 0.16% 3.83%
NYSE COMPOSITE 17616.02 50.95 0.29% 4.53%
S & P 100 INDEX 2413.54 -1.33 -0.06% 7.93%
RUSSELL 2000 2016.69 2.85 0.14% -0.51%
S&P 500 5088.8 1.77 0.03% 6.69%
CBOE MKT VOLATILITY 13.75 -0.79 -5.43% 10.44%
AMEX COMPOSITE 4523.41 4.6 0.1% -1.54%
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