December 13, 2024

Stocks struggled with sticky inflation this week as the CPI and PPI were hotter than expected leaving investors to reevaluate the timeline for future rate cuts. The data pushed yields higher and equities mostly lower as the major averages struggled with mixed earnings and guidance ahead of the coming week's announcement on rates at the FOMC Meeting. Yields inched higher each day with the rate on the 10-year Treasury closing at 4.403% and the two-year T-Bill at 4.251%. As rates rose, the Dow Jones worked lower ending the week on a seven-day losing streak, its longest since February 2020. With a longer pause in rate cuts now expected in 2025, rate sensitive groups were lower with the US Home Construction ETF (ITB) down -5.8% on the week as the 30-year mortgage rate rose back above 7%. Weakness in equities was seen across the board with only the Consumer Discretionary (XLY) and Communication Services (XLC) sectors posting positive. Weighing on the market was weakness in Materials (XLB), Utilities (XLU), Healthcare (XLV), Industrial (XLI) and REITs (XLRE) all down more than -2%. Semiconductors bucked the weak trend as the Philadelphia Semiconductor Index (SOX) outperformed on strong earnings and guidance from Broadcom (AVGO) and Marvell Technologies (MRVL) despite an early hit after China launched an anti-monopoly probe into Nvidia (NVDA). Strength in some of the Magnificent 7 stocks pushed the NASDAQ 100 to record highs during the week, but the broader market didn't participate. The DJIA closed the period down for a second straight week with the S&P 500 also trading lower, while the NASDAQ extended its weekly win streak to four. Next week investors are counting on a reluctant 0.25-point rate cut following the December FOMC Meeting amid a busy week of economic data. Fed chair Powell could end up as the Grinch however, if his comments following the announcement are too hawkish.  

For the period, the DJIA lost 814.46 points (-1.8%) and settled at 43828.06. The S&P 500 lost 39.18 points (-0.6%) and closed at 6051.09. The NASDAQ added 66.95 points (+0.3%) finishing at 19926.72, while the small cap Russell 2000 dropped 62.09 points (-2.6%) and settled at 2346.90.

Market Outlook: The technical condition of the market is positive but deteriorated as the major averages worked off their overbought condition. This week's pullback left the technical indicators mixed with MACD, a short-term trend gauge, bearish for the DJIA and S&P 500, but remained bullish for the NASDAQ. Momentum, as measured by the 14-day RSI, is positive for the S&P 500 and NASDAQ, but slowing for the S&P 500, and has fallen to a neutral reading for the Dow Jones. Major support levels have yet to be tested. The secondary indexes, including the DJ Transportation Index and small cap Russell 2000, are showing negative divergence and the technical indicators are back in bearish ground. The transportation index struggled to find support at its 50-day MA this week and that level will be watched by traders for further weakness, which would be a negative for the market. A positive signal for the broader market is the Philadelphia Semiconductor Index outperforming and closing the period back above its 50-day MA for the first time since early November. A rally in the semiconductors from here could be the key as to whether the stock market will be able to finish the year on a high note. Without participation by the semiconductors a Santa rally would be unlikely. 

Underlying market breadth has moved from mixed to weak and is not supportive of the different indexes making a run at new highs. The NYSE Advance/Decline line, a leading indicator of market direction, has recorded more declining issues than advancing issues on nine of 10 sessions to begin December. The NASDAQ A/D line, though less important, has also been in a downtrend for the last two weeks. Another sign of narrowing leadership is the number of new 52-week highs which have contracted over the last two weeks. That is further confirmation that the major averages are being held up by fewer stocks. In this case, strength in the Magnificent 7 and other large cap tech stocks is once again lifting all ships. 

Investor Sentiment remains overly bullish with Investors Intelligence (II) reporting the Percentage of Bullish Investment Advisors above 60%, considered a danger zone, for a fifth consecutive week. The professionals are all in with the National Association of Active Investment Managers (NAAIM) Exposure Index jumping to 99%, its highest level since the start of the summer selloff in early July. Finally, FINRA reports debit balances in customer margin accounts hit $815.37 million, the highest amount since February 2022 as the stock market was on its way to a bear market. These surveys are considered contrarian indicators when they reach excessive levels and need to be watched. While not a sell signal in themselves, they should be a cautionary signal to investors that we could be nearing a top in the market.

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, unchanged from the previous week. Cycles B, C and E are bullish, while Cycles A and D are bearish. The CTI is now projected to remain in a bullish configuration into 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 3060 units while the number of new 52-week highs exceeded the number of new lows on four days. Breadth was negative at the NASDAQ as the A/D line dropped 4183 units while the number of new lows out did the new highs on three of the five days. Finally, the percentage of stocks above their 50-day moving average fell to 54.5% vs. 61.3% the previous week, while those above their 200-day moving average eased to 63.9% vs. 66.2% 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 -6, up two notches from the previous week.

Market Posture: Based on the status of the Market Edge, market timing models, the 'Market Posture' is Bullish as of the week ending 12/06/2024 (DJIA - 44642.52). 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 (10) - What's Not (20): The following are the strongest and weakest Industry Groups for the period ending 12/12/24. Strongest: Integrated Oil & Gas, Financial Services, Banking and Technology Services. Weakest: Agriculture, Real Estate, Chemicals and REITs. 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 12/12/24 were: Commodity-Energy (+3.03%), Sector-Internet (+1.91%), Specialty Communications (+1.81%), Sector-Telecom (+1.81%) and Commodity-Agriculture (+1.66%). The weakest categories were: Specialty Financial (-2.82%), Bond-Government Long Term (-2.79%), Sector-Basic Materials (-2.60%), Specialty Utilities (-2.58%) and Growth-Mid Cap (-2.45%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT