October 11, 2024

The major averages extended their weekly win streak to five as tame inflation and signs of a softening jobs market kept investors betting on lower interest rates. October volatility remained a force as stocks tumbled Monday on escalating tensions in the Middle East with the DJIA dropping 398.51-points (-0.94%). The different indexes turned it around on Tuesday, led by a jump in semiconductors. The Dow Jones and S&P 500 were able to hit new highs on Wednesday supported by the release of the Fed Meeting minutes that showed most committee members supported further rate cuts. The major averages rallied again to close out the week as Q3 earnings from JP Morgan Chase (JPM), Wells Fargo & Co (WFC) and BlackRock (BLK) beat estimates sending the financial sector ETF (XLF) to a record close. Yields ticked higher during the period with the rate on the 10-year Treasury landing at 4.09% and the two-year T-Bill at 3.953%. Crude oil prices increased for a fourth consecutive week on supply concerns stemming from Middle East tensions and disruptions due to the hurricanes, closing at $75.59 a barrel. Despite new highs, the sectors were mixed. Technology (XLK), Industrial (XLI), Financial (XLF) and Healthcare (XLV) outperformed, while Utilities (XLU), Consumer Discretionary (XLY), Communication Services (XLC) and Energy (XLE) were the weakest market groups. Next week, Q3 earnings will be at the forefront, but election jitters and economic data could also weigh on an overbought market.

For the period, the DJIA jumped 511.11 points (+1.2%) and settled at 42863.86. The S&P 500 gained 63.96 points (+1.1%) and closed at 5815.03. The NASDAQ added 205.09 points (+1.1%) finishing at 18342.94, while the small cap Russell 2000 picked up 21.61 points (+1.0%) and settled at 2234.41.

Market Outlook: The technical condition of the market improved this week with most technical indicators returning to a positive reading. MACD, a short-term trend gauge, crossed into bullish territory for the major averages and Momentum, as measured by the 14-day RSI, is strong and rising. The gains in the last few weeks have left the major averages overbought however, with stochastics in the high 80's which could lead to some consolidation over the near term. There has been more rotation in the markets makeup as rate sensitive sectors Utilities (XLU), REITs (XLRE) and Consumer Staples (XLP) have backed off their September highs as investors shift back to growth which is a positive going forward. In addition, Technology (XLK) is close to matching its July high on another strong move in semiconductors, erasing the dip into a bear market for the Philadelphia Semiconductor Index (SOX). The Financial (XLF) and Industrial (XLI) sectors are the current market leaders.

Underlying market breadth was mixed this week with the NYSE Advance/Decline line flat, while the NASDAQ A/D line lost ground as the downward stall in rates weighed on small caps. The A/D lines are considered leading indicators of market direction and their lagging is a warning that the markets need to consolidate some of the recent rally. New highs however, continued to outnumber the new lows with the new highs on the NYSE beating the new lows for an eighth consecutive week. 

Investor sentiment remains overly bullish but isn't near extreme levels which can indicate a top could be in the making. The Percentage of Bullish Investment Advisors is neutral this week at 53.2%, down from a high of 64.2% in July, which was the most bullish reading since 2020. The American Association of Individual Investors (AAII) survey still shows retail investors more bullish than historical readings but also well off the summer high.

With Q3 earnings season underway, FactSet Research is expecting the S&P 500 to report YoY earnings growth of +4.2% and revenues to grow +4.7%. That still leaves the market overvalued, but investors are likely to continue to buy the dips. Analysts are currently projecting Q4 earnings to jump +14.6% YoY which would bring down the markets forward P/E ratio close to the five-year historical average of 19.5. Finally, we're heading into a seasonally strong period for equities and if forward guidance from companies reporting earnings is positive, we could be setting up for another yearend rally. 

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 three notches from the previous week. Cycles B, C, D and E are bullish, while Cycle A is bearish. The CTI is projected to cross into a bearish configuration in November.

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 four notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 337 units while the number of new 52-week highs exceeded the number of new lows on each day. Breadth was mixed at the NASDAQ as the A/D line lost 756 units while the number of new highs out did the new lows on three days. Finally, the percentage of stocks above their 50-day moving average fell to 59.9% vs. 68.3% the previous week, while those above their 200-day moving average eased to 65.1% vs. 67.0% 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 -3, up a notch 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 08/23/2024 (DJIA - 41175.08). 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 (1) - What's Not (29): The following are the strongest and weakest Industry Groups for the period ending 10/10/24. Strongest: Telecommunications, Technology Services, Hospitality and Insurance. Weakest: Automotive, Healthcare Products, Energy and Wholesale. 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 10/10/24 were: Specialty Technology (+3.68%), Specialty Financial (+2.08%), Growth-Large Cap (+1.88%), Growth-Mid Cap (+1.69%) and Blend-Large Cap (+0.96%). The weakest categories were: Bond-Government Long Term (-2.60%), Specialty Utilities (-1.79%), Sector-Alternative Energy (-1.73%), Specialty Real Estate (-1.57%) and Bond-International (-1.44%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT