April 19, 2024

Almost every bounce was met with selling this week as investors weighed Q1 earnings, yields rising to their highest levels since November and expectations for the Fed's first rate cut being pushed out to September. The week was especially hard on small caps and technology shares with the Philadelphia Semiconductor Index dropping -9.2%. The small cap Russell 2000 is down -9.5% from its recent intraday high. The major averages suffered through one of their longest losing streaks of the year as geopolitical risks also kept investors on the sidelines as tensions in the Mideast increased. Despite the conflicts, crude oil prices closed out the week modestly lower at $83.24 a barrel as stockpiles rose above estimates. Better than expected manufacturing data on Thursday pushed the yield on the two-year T-Bill up to 5% before ending the period at 4.99%, while the rate on the 10-year Treasury landed at 4.625%. Commodity prices continued to step higher with copper hitting its highest price level since June 2022 and gold posting a new record high above $2400 an ounce. The Powershares Agriculture ETF (DBA) closed the period at its highest mark in 10-years. The sectors were mostly lower with Technology (XLK) sinking -6.27% and finishing flat on the year. Consumer Discretionary (XLY), REITs (XLRE), Communication Services (XLC) and Industrial (XLI) were also sharply lower, while Utilities (XLU), Consumer Staples (XLP) and Financial (XLF) outperformed. The Utility sector continues to benefit from analyst comments that power companies will need to ramp up production over the next few years to prevent a shortage on more usage from chips and AI. The market was able to shrug off Israel's retaliatory strike on Iran to finish mixed on Friday leaving the DJIA flat on the week, while the S&P 500 traded lower for a third consecutive week. The NASDAQ tumbled for a sixth week out of the last seven. 

For the period, the DJIA added 3.16 points (+0.0%) and settled at 37986.40. The S&P 500 fell 156.18 points (-3.0%) and closed at 4967.23. The NASDAQ turned its worst week of the year dropping 893.08 points (-5.5%) finishing at 15282.01. The small cap Russell 2000 tumbled 55.51 points (-2.8%) and settled at 1947.66.

Market Outlook: The technical condition of the market deteriorated this week as the major averages were unable to hold key MA support levels. The DJIA, NASDAQ and Russell 2000 all dropped below their respective 100-day MA, while the S&P 500 closed between its 50 and 100-day MA. In addition, only two of the 11 market sectors, Utilities (XLU) and Energy (XLE), have been able to stay above their 50-day MA. The technical indicators for the major averages are in negative ground with MACD, a short-term trend gauge, bearish and Momentum, as measured by the 14-day RSI, negative. As mentioned earlier, the secondary indexes, which includes the DJ Transportation Index, DJ Transportation Index and Philadelphia Semiconductor Index, are leading the market lower with the transports and small caps negative y-t-d which is a negative going forward. However, the market has become oversold and there are mixed signals that hint that we could be near, or at, a short-term bottom. The Market Edge/S&P Short Range Oscillator (SRO) ended the period at 5.64% which historically has represented a tradeable bottom, and could bring institutional investors off the sidelines. Finally, market technicians will caution that the current pullback has been orderly and on low to average volume. That suggests that investors are taking the selloff in stride, which could be another red flag. With the VIX surging to its highest level since October, investors may want to wait for a selloff on big volume that sends the VIX up to the low 20's before trying to buy a dip. 

Underlying breadth, though negative on the week, showed positive divergence with more advancing volume than declining volume on Thursday and Friday. While the NYSE Advance/Decline line was flat on Thursday and positive on Friday, at this stage it indicates that some traders are buying the dip. 

Investor Sentiment is reverting to a more neutral stance. According to the American Association of Individual Investors (AAII), retail investors finished the week with a bull to bear ratio of 1.1:1, down from 2.5:1 a few weeks ago. Most of that change was due to a jump in pessimism to 34% from 24% the prior week, the most bearish retail investors have been since the end of October. The professionals are also becoming more cautious with the National Association of Active Investment Managers (NAAIM) Exposure index dropping for a third consecutive to a neutral 63% from 103.9% at the end of March.

As mentioned last week, with inflation sticky and the Federal Reserve now projecting that it is likely to take longer to meet conditions to cut interest rates, the dynamics of the market have changed. The rally that was triggered off the October lows by a dovish Fed that saw a pivot in rates has become more uncertain after three months of hotter than expected inflation. Yields are revisiting their November levels and are likely to keep a lid on equity prices unless we see weakness either in the housing market, jobs data or a resumption of lower inflation. Despite mixed signals in the market that suggest a possible bottom is in sight, investors need to remain cautious. Next Friday, the Personal Consumption Expenditures (PCE) index is released and the core-PCE, the Fed's preferred measure on inflation is estimated to come in up +0.3%, the same as February, and increase +2.7% YoY vs. +2.8% the prior month. A cooler print would renew calls for a June rate cut and help firm equity prices. Another upside surprise is likely to rattle the market and push rate cuts out even further leading to another leg lower for the major averages. If that happens, a downside target for the DJIA would be 36,960-37,000 and 4935 for the S&P 500, followed by 4820-4850, a 38.2% retracement of the October-March rally. More weakness in the NASDAQ could target 14980-15,000. The 38.2% retracement of its October-March bull run. Until then, look for choppy trading next week on earnings from the Magnificent 7. 

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 Neutral at +1, unchanged from the previous week. Cycles B, D and E are bullish, while cycles A and C are bearish. While the forecasting model for the market was projected to show a tradable bottom several weeks ago with several cycles due to reset, that reset never occurred and the cycles are extended. After the cycles extended past what would be considered a time for a reset, the CTI is changed to a neutral configuration until an identifiable bottom can be seen on the charts and then reset. The current selloff will likely be cause for a reset of several cycles. 

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 negative at the NYSE as the Advance/Decline line lost 1870 units while the number of new 52-week lows exceeded the number of new highs on five session. Breadth was also negative at the NASDAQ as the A/D line dropped 4765 units while the number of new lows out did the new highs on each day. Finally, the percentage of stocks above their 50-day moving average dropped to 25.7% vs. 49.8% the previous week, while those above their 200-day moving average fell to 55.5% vs. 64.7% 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 -4, up a notch from the previous week.

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 03/22/2024 (DJIA - 39475.90). 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 (31) What's Not (60). Of the 91 Industry Groups that we track, 31 are rated as either Strong or Improving while 60 are regarded as Weak or Deteriorating. The previous week's totals were 45-46. The following are the strongest and weakest groups for the period ending 04/11/24. Strongest: Aluminum, Metals Non-Ferrous, Heavy Construction and Precious Metals. Weakest: Trucking, Media-Publishing, Medical/Bio Technology and Toys. 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 04/18/24 were: Shorts (+7.09%), Commodity-Base Metals (+3.66%) and Commodity-Agriculture (+2.93%). The weakest categories were: Sector-Alternative Energy (-7.93%), Specialty Technology (-7.31%), Blend-Small Cap (-6.24%), Growth-Small Cap (-5.39%), Sector-Energy (-4.86%) and Sector-Internet (-4.69%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT