January 27, 2023

The major averages were able to grind higher this week on volatile trading as investors raked over earnings that weren't as bad as feared. Also supporting higher prices was economic data that firmed the case that the Federal Reserve might maneuver a soft landing for the US economy. The week opened sharply higher after Barclay's upgraded the semiconductor industry sending the Philadelphia Semiconductor Index (SOX) soaring +5.01% on Monday, and the NASDAQ +2.01%. Mixed earnings from Microsoft (MSFT), Raytheon Technologies (RTX), AT&T (T), Boeing (BA) and several regional banks led to choppy trading before a +10.97% spike in shares of EV maker Tesla (TSLA) drove the NASDAQ to a four-month high on Thursday. Better than expected economic data and easing inflation data on Friday helped boost the different indexes again and the DJIA strolled into the weekend on a six-day win streak, its longest daily run since October. Investors plowed into growth sectors with Consumer Discretionary (XLY) Communication Services (XLC), Technology (XLK), REITs (XLRE) and Financials (XLF) leading the charge followed by strength in Industrials (XLI). Healthcare (XLV) and Utilities (XLU) were the only sectors finishing in the red. Crude oil prices nudged higher crossing above $80 a barrel on expected demand from China's reopening, but ended the week at $79.42. On the flip side of that, Natural Gas prices continued to slide on warmer temperatures. Natural Gas prices finished the period down more than -12%, hitting its lowest mark since March 2021. Interest rates were little changed ahead of next week's FOMC Meeting with the CME FedWatch projecting a 99% probability of a 0.25-point hike. Looking ahead, traders are betting that the Federal Reserve will pause their rate tightening at the March meeting. Next week we get another round of earnings from big cap technology companies and the Fed's announcement on rates that should keep volatility high but could lead to some consolidation of recent gains. After Friday's run, the bulls looked in control going into the weekend with the NASDAQ on a four-week win streak.

For the period, the DJIA gained 602.59 points (+1.8%) and settled at 33978.08. The S&P 500 added 97.95 points (+2.5%) and closed at 4070.56. The NASDAQ jumped 481.28 points (+4.3%) finishing at 11621.71. The small cap Russell 2000 picked up 44.11 points (+2.4%) finishing at 1911.45.

Market Outlook:The technical condition of the market improved this week as the major averages were able to finish higher with several bullish technical events occurring. Point & Figure chartists will note that the DJIA, Russell 2000 and Philadelphia Semiconductor Index (SOX) all broke out from Bullish P&F Double Top formations, while the NASDAQ broke out of a Bullish P&F Triple Top formation. The S&P 500 will have a Bullish Triple Top Breakout once it trades above resistance at 4100. The technical indicators for the major averages are all in bullish ground with MACD, a trend gauge, positive and Momentum, as measured by the 14-day RSI, strong and moving higher. The NASDAQ traded above its 200-day MA on Thursday for the first time since January 2022 and reached its highest close since September. The small cap Russell 2000 and Philadelphia Semiconductor Index also were able to take out the November and December highs with the August highs in sight. In addition, these secondary indexes saw a Golden Cross whereas the 50-day MA crosses above the 200-day MA confirming the longer-term trend is bullish. The DJ Transportation Index was the laggard this week held back by disappointing earnings from railroads. 

Underlying breadth was positive as the NYSE and NASDAQ Advance/Decline lines were sharply higher showing broad accumulation. The NYSE A/D line hit its highest accumulative reading since August. New 52-week highs outnumbered new lows for a fourth consecutive week and are expanding, confirming the move, while volume, especially on the NASDAQ, has been above average. Increasing volume as the market moves higher bodes well for stocks going forward. Investor Sentiment remains neutral, and the numbers were mixed for this reporting period. The American Association of Individual Investors (AAII) shows the percentage of bullish retail investors eased, while the National Association of Active Investment Managers (NAAIM) Exposure Index jumped for a third straight week to 75.2%, up from only 38.8% just three weeks ago. That is the most exposure to equities for the professionals since April 2022.

Finally, it's worth noting that this week FINRA reported margin levels fell for a fourth consecutive month with December margin down -5.7% at $606,659,000. That is the lowest margin debt since June 2020. If you're not familiar with margin debt, it is investing with borrowed money and considered by market technicians as a ëgreed' indicator. In a bull market, greedy investors get so bullish that they are willing to borrow money to invest in the stock market to increase returns. Investors will pile on debt until the market crashes, and they have to sell equities to raise cash to pay off their margin loan, triggering more selling. When margin levels are low and falling, it usually is a sign that the stock market may be near a bottom as investors are bearish on stocks and have raised their cash levels, increasing their buying power down the road. While low margin levels is not a buy signal in itself, an uptick in the amount of margin debt is a sign that investors are once again getting bullish on the market and spark a big influx of money going back into equities, sending the stock market sharply higher. FINRA reports margin debt the third week of the month and if we see an increase in the numbers, it could lead to a continuation of the current 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 Negative at -3, down two notches from the previous week. Cycles C and D are bullish, while Cycles A, B and E are bearish. The CTI is projected to remain in a negative configuration through February.

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 +10, up three notches from the previous week. Breadth was positive at the NYSE as the Advance/Decline line added 3205 units while the number of new 52-week highs exceeded the number of new lows on all five sessions. Breadth was also positive at the NASDAQ as the A/D line gained 2668 units while the number of new highs out did the new lows on each day. Finally, the percentage of stocks above their 50-day moving average jumped to 77.3% vs. 61.1% the previous week, while those above their 200-day moving average increased to 63.5% vs. 54.1%. 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 Neutral at +2, up a notch from the previous week. In addition, we track money flows into and out of Equity Funds and ETFs which as of 1/25/23 shows outflows of $555 million. 

Market Posture: Based on the status of the Market Edge, market timing models, the Market Posture is Neutral as of the week ending 1/13/2023 (DJIA - 34302.61). 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 (63) What's Not (28). Of the 91 Industry Groups that we track, 63 are rated as either Strong or Improving while 28 are regarded as Weak or Deteriorating. The previous week's totals were 58-33. The following are the strongest and weakest groups for the period ending 1/26/23. Strongest: Coal, Diversified Mining, Metals-Non Ferrous and Footwear. Weakest: Retailers-Drug Based, Household Products (Durable), Marine Transportation and Automobile Mfg. 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 1/26/23 were: Specialty Technology (+7.22%), Sector-Internet (+6.73%), Specialty Natural Resources (+6.28%), Specialty Financial (+5.96%) and Sector-Telecom (+5.37%). and Bond-International (+2.35%). The weakest categories were: Shorts (-6.54%), Bond-Government Long Term (-0.85%), Bond-Multisector Aggregate (-0.32%) and Commodity-Precious Metals (-0.16%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT