Story

Stocks Rise As Inflation Woes Wilt

On The Edge (Monthly)

MARKET REVIEW – JULY 2022

 

With economic data hinting at a slowdown, combined with persistent inflationary concerns, a rotation out of cyclical and industrial stocks and back into growth and technology names led to solid gains for the S&P 500, NASDAQ and NASDAQ 100 throughout the month of June. The DJIA got off to a hot start as the blue-chip index gained +226.96 points (+0.8%) during the first four sessions of the month as oil names jumped on projections of strong demand by OPEC and rising fuel prices. However, the rally in the Dow was short-lived as key inflation data and a soft jobs report showed an economy struggling to get people back to work. As a result, yields eased down and investors scooped up growth and big cap technology names such as Alphabet (GOOGL), Adobe (ADBE) and Nvidia (NVDA) which all set new all-time highs, while the DJIA consolidated its most recent gains and fell back to its 21-day moving average. By the middle of the month, investors grew more uneasy following Fed Chair Jerome Powell’s statement that the committee expected to raise rates sooner than earlier forecasted. That was followed by an unexpected rise in the weekly jobless claims and a spike in the US Dollar (UUP) that initially tanked commodities. The selloff in the DJIA picked up steam, as it erased all the gains going back to early April and turned in its worst weekly performance of the year, as it declined by 1189.52 points (-3.4%) during a five-session losing streak. That decline led to the blue-chip index breaking below its 50-day moving average and testing its 100-day moving average for the first time since November 2020. With the market in need of a catalyst, it got several in the form of an announced $1 trillion bipartisan infrastructure plan and testimony from Fed Chair Jerome Powell that inflation was transitory. The yield on the 10-year and 30-year Treasury bills eased to levels last seen in March, sliding to 1.47% and 2.10% respectively. The lowered rates inflated growth and technology shares and the S&P 500 got in on the act joining the NASDAQ and NASDAQ 100 at new record highs. Technology (XLK), Consumer Discretionary (XLY), Energy (XLE) and Communications Services (XLC) all outperformed during the timeframe while Basic Materials (XLB), Financials (XLF), and Utilities (XLU) underperformed and finished in negative territory. The market continued to get a boost from Covid-19 vaccinations while trillions of dollars of fiscal stimulus have kept consumers flush with cash and ready to spend. However, the balancing act between an overheating economy continues to increase speculation that the Federal Reserve will be forced to act on interest rates sooner than later. For the month, the DJIA snapped a four month consecutive win streak but held onto a 12.7% advance for the first half of the year as it lost 26.94 points (-0.08%) and settled at 34502.51. However, the S&P 500 finished the month strong as it posted five straight new all-time highs at the end of the month and finished off its second best first half of the year since 1998 with a monthly gain of 93.39 points (+2.22%), finishing at 4297.50. The DJ Transportation Index was the largest percentage decliner as it lost 869.52 points (-5.52%) and settled at 14880.79 slowed by rising fuel costs.

 

Both the NASDAQ and NASDAQ 100, which is primarily made up of large cap technology names, went on to post their best month since November 2020, as a drop in yields combined with uneasiness with the Covid-19 Delta variant led investors to rotate back into technology companies. Firms such as DocuSign (DOCU +38.66%) and Nvidia (NVDA +23.13) powered the NASDAQ to six new all-time highs while the NASDAQ 100 had seven new all-time highs of its own. The NASDAQ Biotechnology ETF (IBB) also outperformed, led by Moderna (MRNA +27.01%) and Illumina (+16.66), as it gained 7.70% for the month. The Philadelphia Semiconductor Index (SOX) was also a strong outperformer as it moved higher by +4.98%, as Nvidia (NVDA), Marvell Tech Group (MRVL) and Advanced Micro Devices (AMD) all moved higher by more than +17% on the month. The NASDAQ, which has now been up for the 7th time in 8 months, gained 755.21 points (5.49%) to finish at 14503.95. The small cap Russell 2000 extended its monthly win streak to nine consecutive months as it moved up 41.58 points (+1.83%), as it finished at 2310.55.

 

MARKET OUTLOOK

 

The technical condition of the market improved as June closed as the major averages overcame some weakness mid-month before finishing out strong sending the S&P 500, NASDAQ and NASDAQ 100 to new record highs. The technical indicators ended in positive ground for the different indexes with MACD, a short-term trend gauge, back in bullish ground and Momentum, as measured by the 14-day RSI, positive and moving higher. The major averages were able to test support and rebound back above their respective 50-day moving average (MA) towards the end of the month The small cap Russell 2000 outperformed the broader market and has traded higher for five weeks in a row but remains below its record high. Leadership by the small caps is seen as a positive going forward.  The DJ Transportation Index showed negative divergence and lagged the broader market during the month as it trades below its 50-day MA. While leadership by the transports is seen as a positive, the group has been hampered by rising fuel costs which has dented performance. The Philadelphia Semiconductor Index (SOX) showed relative strength and benefited from the pullback in yields. Five sectors were able to trade at new highs this month including Technology (XLK), Communication Services (XLC), Healthcare (XLV), Financials (XLF) and Consumer Staples (XLP). Internal breadth was mostly positive with the NYSE Advance/Decline, a leading indicator of market direction, posting seven new highs during the month, but peaking mid-month. The NASDAQ A/D line was also sharply higher showing most stocks are under accumulation. New 52-week highs however, contracted during the month after topping out in May. While volume was somewhat lighter than usual this month, it was mainly due to a lack of declining volume as sellers of equities were hard to find. That goes along with investor sentiment remaining too bullish. As June was ending, the Percentage of Bearish Investment Advisors had fallen to 15.8%. That is the smallest number since March 2018! In addition, the American Association of Individual Investors (AAII) was showing Bulls outnumbered Bears better than 2:1. It looks like the Bears have packed it in and that is a red flag that investors are too complacent.

 

CYCLICAL TREND INDEX (CTI): Bearish

Presently the CTI is Negative at -9, down 4 units from the previous month. The counts for Cycles A, B, C, D and E are bearish.

 

Cycle

Average # Of Weeks

In The Cycle

# Of Weeks Since

Previous Bottom

Bullish Or Bearish

Connotation

A

6 +  or    -1 Week

2 Weeks

Bullish

B

18 +  or    -2 Weeks

17 Weeks

Bearish

C

36 +  or    -4 Weeks

35 Weeks

Bearish

D

72 + or    -7 Weeks

66 Weeks

Bearish

E

216 + or   -20 Weeks

66 Weeks

Bullish

 

The following are projected CTI readings through the week ending 7/31/21. 

 

Week Ending

CTI

Connotation

6/25/21 (Actual)

-9

Bearish

7/02/21 (Projected)

-9

Bearish

7/09/21 (Projected)

-9

Bearish

7/16/21 (Projected)

-10

Bearish

7/23/21 (Projected)

-10

Bearish

 

 

** The CTI is the total of the plus and minus values assigned to each cycle based on the number of weeks that have passed since their previous cyclical bottom.  For a detailed explanation of the market timing models, click on "Market Letter Help" located on the top of the 'Market Letter'.

 

Market Posture Performance 2019-2021

The following is the performance record of the Market Edge ‘Market Posture’ for 2019 - 2021

 

Projected Strong Periods:

 

Actual Results – DJIA

01/04/19 - 03/15/19   (23433.16 – 25887.38)

DJIA Gain/Loss

+2454.22

04/18/19 - 08/02/19   (26559.54 – 26485.01)

DJIA Gain/Loss

-74.53

09/03/19 - 11/22/19   (27219.52 – 27865.62)

DJIA Gain/Loss

+646.10

04/09/20 - 10/23/20   (23719.37 – 28335.57)

DJIA Gain/Loss

+4616.20

11/13/20 - 05/28/21   (29410.00 – 34529.45)

DJIA Gain/Loss

+5119.45

 

 

Projected Weak Periods:

 

Actual Results – DJIA

09/28/18  - 01/04/19  (26458.31 – 23433.16)

DJIA Gain/Loss

-3025.15

08/01/19  - 09/03/19  (26485.01 – 27219.52)

DJIA Gain/Loss

+734.51

01/03/20  - 02/14/20  (28634.88 – 29398.08)

DJIA Gain/Loss

+763.20

10/23/20  - 11/13/20  (28335.57 – 29479.81)

DJIA Gain/Loss

+1144.24

06/18/21   -    ???       (33290.08 –     ???    )

DJIA Gain/Loss

???

 

 

MOMENTUM INDEX: Neutral

As of the close on 6/25/21, the Momentum Index is Neutral at +1, unchanged from the previous month. The Momentum Index is a gauge of bullish or bearish divergence in the market.  Readings of +04 and higher are regarded as bullish signaling stronger performance from the majority of the broader indexes vs. the DJIA.  Conversely, readings of -04 or lower are regarded as bearish. Below is a chart of the performance of seven of the major, broad market indexes included in the Momentum Index vs. the DJIA since the last major cyclical low.

 

Prev. Highs

DJIA

DJTA

S&P 500

NYSE

R-2000

NASDAQ

UTIL

A/D LINE

Apr 2021

34777.76

15943.30

4232.60

16590.43

2360.17

14138.78

933.37

+523500

6/30/2021

34502.51

14880.79

4297.50

16555.35

2310.55

14503.95

876.07

+526191

%Change

-0.8%

-6.7%

+1.5%

-0.2%

-2.1%

+2.6%

-6.1%

+0.5%

 

Average % Change of the Broad Market Indices: -0.9%

 

The broader market indexes are down on average -0.9% from their April 2021 closing highs vs. -0.8% for the DJIA resulting in the Neutral +1 reading. Breadth was positive during the month at the NYSE as the Advance/Decline Line gained 4013 units vs. a gain of 4636 units in May while the number of new 52-week highs surpassed the new lows on all 22 sessions. The breadth at the NASDAQ was also positive as the A/D line gained 3356 units vs. a gain 56 units in May, while the number of new highs surpassed the new lows on all 22 sessions. Finally, the percentage of stocks above their 50-day moving average fell to 54.8% from 67.0% while those above their 200-day decreased to 83.5% vs. 84.8% from the previous month. Readings above 70.0% denote an overbought condition.

 

SENTIMENT INDEX: Negative

The Sentiment Index for the month ending 6/25/21 is Negative at -3, down two notches from the previous month. The Sentiment Index tracks thirteen market indicators that measure excessive bullish or bearish conditions prevalent in the market. Whenever the crowd becomes overly optimistic (a bearish condition), the readings from the Sentiment Index will drop into negative ground. Conversely, when fear is rampant (a bullish condition), the index will be in the +3 to +8 area.

 

The Dividend Yield Spread (0.37 vs. 0.34) is Bullish. NYSE short interest was up +0.3% and 3.4 days of average volume for the period ending 6/15/21 vs. being down -0.4% and 3.2 days average volume to cover at the end of May. Short interest at the NASDAQ was down -0.6% and 2.4 days of average volume mid-June vs. a +0.0% increase and 2.5 days average volume to cover on 5/31/21. The Fear and Greed Index (33.8 vs. 49.0), the NAAIM Exposure Index (70.9 vs. 98.5) and the VIX, a measurement of fear in the market, (15.62 vs. 20.70) are Neutral. The Percentage of Bullish Investment Advisors (56.5% vs. 54.1%), the Percentage of Bearish Investment Advisors (15.8% vs. 16.3%), the AAII Bull-Bear Ratio (1.7 vs. 1.6), the Total Put/Call Ratio (0.83 vs. 0.89) and the Bullish-Bearish Investment Advisors Ratio (3.6 vs. 3.3) are Bearish. VIX readings under 13.00 are regarded as bearish while those above 30.0 are bullish.

 

U.S equity funds, including ETF activity, had inflows of $10 billion for the reporting period ending 6/23/21 compared to outflows of $7.1 billion the previous week

 

**To view the charts and graphs of the major market indexes and pertinent technical indicators that are incorporated in the Momentum and Sentiment indexes go to the Market-At-A-Glance section located under Market Recap on the Market Edge home page.

  

 

MARKET POSTURE: Bearish

Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bearish as of the week ending 6/18/2021 (DJIA – 33290.08). The Market Posture is expected to remain bearish through mid-July 2021. For a closer look at the technical indicators and studies that make up the market timing models, check out the 'Market Letter (Weekly)' located on the Market Edge home page. (www.marketedge.com).

             

 

Take a look at the new ‘Dr. Market Edge Talks Stocks’ section located on the Markets or Home Page.  Every Tuesday, the good Doctor reviews three stocks that have recently been in the news.  These articles will help you evaluate stocks when viewing Smart Charts and the Second Opinion reports.

 

ETF Center: The top performing ETF categories for the period ending 6/24/21 were: Sector-Energy, Sector-Financial, Growth-Small Cap, Value-Small Cap and Commodity-Energy. The weakest categories were: Shorts, Bond-Government Long Term, Commodity-Agriculture and Bond-International. To review all the categories in the Market Edge universe, click on the ETFs tab.

 

Industry Group Rankings: What's Hot (39) – What’s Not (52)

Of the 91 Industry Groups that we track, 39 are rated as either Strong or Improving while 52 are regarded as Weak or Deteriorating. The previous month’s totals were 32-59. The following are the strongest and weakest groups for the period ending 6/24/21. Strongest: Oilfield-Drilling, Oilfield-Equipment, Internet-Financial and Oilfield-Integrated Majors. Weakest: Trucking, Beverages, Media-Publishing and Airlines. To review all the Industry Group rankings, click on the Industries tab.

 

SUGGESTIONS FOR SELECTING BUY CANDIDATES

1) Initiating new long positions for an intermediate-term trading approach:

a)  Go to Stock Watch, select a list, click on the Opinion/Conditions drop down and then on Long for potential buy candidates.  Click on the Situations drop down and then on Early Entry Longs.

b)  Click on the Trading Ideas tab and then on Money Runner.  Select stocks from the Today's Buy list.

c)  For a more conservative approach, check out the ETF Center.  Choose a category that is either 'Improving' or 'Strong' and then choose ETF's with Long Opinions as potential buys.

d)  Click on the Trading ideas tab on the toolbar and then on Prime Ideas.  Choose one of the five investment styles to retrieve a list of stocks that have both favorable technical and fundamental characteristics.

 

2) Initiating new positions for a short-term trading approach:

a)  Click on Trading Ideas located on the toolbar.  Then click on Trading Desk and select either NYSE or NASDAQ Short Term Buys.

b)  Click on the Advanced Tools tab and then on either the Point & Figure Breakouts or Point & Figure Early Alert modules.  Look for stocks that have either broken or are in the process of breaking either a Triple Top or Quadruple Top and have a Long Opinion for potential buy candidates.

 

SUGGESTIONS FOR SELECTING SHORT-SALE CANDIDATES

1) Initiating new short positions for an intermediate-term trading approach:

a)  Go to Stock Watch, select a list, click on the Opinion/Conditions drop down and then on Avoid for potential short sale candidates.  Click on the Situations drop down and then on Early Entry Shorts. 

b)  Click on the Trading Ideas tab and then on Money Runner.  Select stocks from the Today's Shorts list as potential short sale candidates.

c)  For a more conservative approach, check out the ETF Center.  Choose a category that is either 'Deteriorating' or 'Weak' and then choose ETF's with Avoid Opinions as potential shorts.

d)  Click on the Trading Ideas tab on the toolbar and then on Prime Ideas.  Choose Short Sale Candidates for stocks that are considered to be broken momentum stocks.

 

2) Initiating new positions for a short-term trading approach:

a)  Click on Trading Ideas located on the toolbar.  Then click on Trading Desk and select either NYSE or NASDAQ Short Term Shorts.

b)  Click on the Advanced Tools tab and then on either the Point & Figure Breakouts or Point & Figure Early Alert modules.  Look for stocks that have either broken or are in the process of breaking either a Triple Bottom or Quadruple Bottom and have an Avoid Opinion for potential short sale candidates.

 

 

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Market Indicators

Market Posture Cyclical Trend Index
Bearish
-10
As of: 06/18/2021
As of: 07/16/2021
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Second Opinion Performance

Second Opinion Status

3048

Current Opinions
As of: 07/23/2021

76%

Long Accuracy
As of: 07/23/2021

65%

Avoid Accuracy
As of: 07/23/2021
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Market Recap - 07/23/2021

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 14836.99 152.39 1.04% 15.12%
DJ UTILITIES 904.54 11.56 1.29% 4.61%
DJ TRANSPORT 14756.07 101.43 0.69% 17.98%
DJ INDUSTRIALS 35061.55 238.2 0.68% 14.56%
NYSE COMPOSITE 16552.38 96.46 0.59% 13.96%
S & P 100 INDEX 2031.92 20.77 1.03% 18.1%
RUSSELL 2000 2209.65 10.17 0.46% 11.89%
S&P 500 4411.79 44.31 1.01% 17.46%
CBOE MKT VOLATILITY 17.2 -0.49 -2.77% -24.4%
AMEX COMPOSITE 2965.89 -4.45 -0.15% 25.63%
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