MARKET REVIEW – AUGUST 2022

Following a historically tumultuous first half of the year, the stock market turned over a new leaf in July and reversed course to finish with its best month since November 2020. The month got off to an uneven start as hawkish comments from the Federal Reserve, high yields, recession fears and runaway inflation continued to douse relief rallies. More bad news came in the form of fresh new China lockdowns to combat a new variant spread of Covid, a rising US Dollar and hot CPI number jumping +9.1% YoY, the largest gain in inflation since 1981. That set off a five-day losing streak for both the DJIA, which tumbled by 754.38 points (-2.4%) and the S&P 500, which tumbled lower by 112.24 points (-2.9%), pulling the major indexes into bear market territory. With Q2 earnings rolling in, overall sentiment continued to fall with Money Center bellwethers JP Morgan Chase (JPM) and Morgan Stanley (MS) dipping after missing estimates. Just when investors were ready to throw in the towel, a strong June Retail Sales number combined with better earnings, which showed high inflation did not stop consumer spending, initiated a market reversal. The rally gained steam as more Q2 earnings were coming in better than expected and the ECB announcing it would hike rates 0.50-basis points. The turnaround pushed the major averages back above their 50-day MA for the first time in two-months. Despite economic data showing the economy slowing, the major averages continued to add to gains following strong earnings from the likes of Apple Co. (AAPL), Microsoft (MSFT), JB Hunt Transportation (JBHT), Tesla (TSLA), Danaher (DHR), and Philip Morris International (PM). Furthermore, the Federal Reserve hiked rates by 0.75 point as expected and market participants rotated back into growth and technology stocks as Fed Chair Jerome Powell laid out a clear and less hawkish strategy to navigate a soft landing for the economy. Towards the last week of the month, the bulls kept on rolling as the market was able to snake past a poor Q2 GDP report showing negative growth for a second consecutive quarter and instead, cheered on the passage of the Chip Act and Clean Climate Act which promised to increase government spending to prop up the economy. The market responded with the DJIA climbing by 945.84 (3.0%) and the S&P 500 gaining 168.66 (4.25%). Treasury yields moved lower on growth concerns with the 10-year T-Bill landing at 2.65 and 2-year T-Bill settling at 2.89% while Copper jumped nearly +7% after hitting a 19-month low earlier in July. The broad-based July rally lifted every sector into positive territory, led by Consumer Discretionary (XLY), Technology (XLK), Industrials (XLI) and Real Estate all posting gains north of +8% with Communications Services (XLC) bringing up the rear as it jumped +2.6%. On the month, the DJIA gained 2069.70 points (+6.73%) and settled at 32845.43. The S&P 500 surged by 344.91 points (+9.11%) to finish at 4130.29.  

Both the tech-heavy NASDAQ and NDX 100, which were hard hit last month, did an about face in July and rallied for their best month since April 2020. The Philadelphia Semiconductor Index (SOX +14.11%) reversed the prior month’s decline, led by Marvell Technology Group (MRVL +25.63%) and Micron Technology (MU +21.13%). The iShares NASDAQ Biotechnology ETF (IBB +5.48%), extended its monthly win streak to three, with gains from Illumina (ILMN +16.23%) and Moderna (+14.90), the latter of which is tasked with additional boosters to combat rising Covid variants globally. The NASDAQ led the market higher, as it rose by 1361.95 points (+12.35%) and settled at 12390.69. The small cap Russell 2000 also outperformed for the period as it gained 177.24 points (+10.38%) to end the month at 1885.23.

MARKET OUTLOOK

The technical condition of the market improved in July as the major averages were able to finally reverse negative market momentum and close near their June highs. The technical indicators also improved and finished the month in bullish ground. MACD, a short-term trend gauge, and Momentum, as measured by the 14-day RSI, are both positive. The gains also sent the DJIA and S&P 500 back above their respective 100-day MA for the first time since early April, and for the NASDAQ, the first time since early January. The DJ Transportation Index and Russell 2000, which market technicians like to see lead the market higher and lower, outperformed the broader market, also trading through their 100-day MA which bodes well for the market going forward. While the June highs could represent short-term resistance after a more than 10% surge off the June lows, trading above their 100-day MA may have triggered a short covering rally that could send the market on another leg higher as we roll into August. For now, however, the NASDAQ hit our first target of 12350 as July came to a close. The near-term target for the DJIA is 33150-33250 and 4150-4200 for the S&P 500. Underlying breadth confirmed the move higher during the month with the NYSE and NASDAQ Advance/Decline lines sharply higher, showing broad participation in the rally. Investor Sentiment saw an uptick among the bulls late in the month. After reaching extreme levels of bearishness, the Percentage of Bullish Investment Advisors topped the Bearish Investment Advisors for the first time in 11-weeks. In addition, the National Association of Active Investment Managers (NAAIM)Exposure Index ticked higher showing hedge funds are adding to equity exposure here after falling to only 19.9% equity exposure at the end of June.

Despite the Fed's 0.75-point rate hike and Fed Chair Powell stating that ongoing rate hikes would be appropriate, Treasury yields were moving lower as July was ending. That is due to economic data that continues to show the US economy is slowing and rate hikes are working. Raising rates into a slowing economy, however, has been a recipe for disaster in the past and despite recent stock gains, investors may need to remain cautious. The yield curve between the two-year and 10-year remains inverted, which keeps a recession in play and despite the rally off the June lows, it takes time for rate hikes to work themselves into the economy. Wells Fargo Investments recently released a study that concluded all bear markets are not the same. If the S&P 500 falls into a bear market and the economy is not in a recession, the average bear market has close to a six-month timeframe. However, if a bear market is accompanied by a recession, it extends closer to 20 months. The US economy technically is in a recession, two quarters of negative GDP, but some analysts are saying that due to a strong jobs market we aren’t in a recession. Take your pick, but for now, and with August historically one of the weakest months of the year, investors might want to error on the side of caution for a few more weeks before hitching your wagon to this bull.

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): Bullish

Presently the CTI is Bullish at +4, down three notches from the previous month. The counts for Cycles B, C and E are bullish, while Cycles A and D are bearish.

The following are projected CTI readings through the week ending 8/26/22.

** 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 2019-2022

The following is the performance record of the Market Edge ‘Market Posture’ for 2019 - 2022

MOMENTUM INDEX: Positive

As of the close on 7/29/22, the Momentum Index is Positive at +8, up five notches 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.

Average % Change of the Broad Market Indices: +12.4%

The broader market indexes are up on average +12.4% from their June 2022 closing lows vs. +9.9% for the DJIA resulting in the Positive +4 reading. Breadth was mixed during the month at the NYSE as the Advance/Decline Line increased by 9417 units vs. a decrease of 7683 units in June while the number of new 52-week lows surpassed the new highs on 19 of 20 sessions. Breadth at the NASDAQ was also mixed as the A/D line increased by 7173 units vs. a loss of 8842 units in June, while the number of new lows surpassed the new highs on all 20 sessions. Finally, the percentage of stocks above their 50-day moving average jumped to 67.9% from 21.4% while those above their 200-day moving average rose to 26.5% vs. 16.0% from the previous month. Readings above 70.0% denote an overbought condition.

SENTIMENT INDEX: Positive

The Sentiment Index for the month ending 7/29/22 is Positive at +5, even with 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 (-1.74 vs. -1.86), the AAII Bull-Bear Ratio (0.7 vs. 0.5), the Bullish-Bearish Investment Advisors Ratio (1.0 vs. 0.8) and the Percentage of Bullish Investment Advisors (38.9% vs. 32.9%) are Bullish. NYSE short interest was up +0.2% and 2.7 days of average volume for the period ending 7/15/22 vs. being up +0.9% and 3.3 days average volume to cover at the end of June. Short interest at the NASDAQ was down -0.9% and 2.7 days of average volume mid-July vs. a -0.4% decrease and 2.2 days average volume to cover on 6/30/22. The Percentage of Bearish Investment Advisors (33.3% vs. 40.0%), the NAAIM Exposure Index (47.2 vs. 30.7), the Fear and Greed Index (37.8 vs. 26.2), the VIX, a measurement of fear in the market (21.33 vs. 27.23) and the Total Put/Call Ratio (1.04 vs. 1.07) are Neutral. VIX readings under 13.00 are regarded as bearish while those above 30.0 are bullish.

U.S equity funds, including ETF activity, July had outflows of -$21 billion for the reporting period ending 7/29/22 compared to outflows of -$44 billion the previous month.

**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: Bullish

Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bullish as of the week ending 6/24/2022 (DJIA – 31500.68). 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 7/28/22 were: Sector-Alternative Energy, Sector-Energy, Specialty Natural Resources, Commodity-Agriculture and Blend-Small Cap. The weakest categories were: Shorts and Bond-Government Long Term. To review all the categories in the Market Edge universe, click on the ETFs tab.

Industry Group Rankings: What's Hot (72) – What’s Not (19)

Of the 91 Industry Groups that we track, 72 are rated as either Strong or Improving while 19 are regarded as Weak or Deteriorating. The previous month’s totals were 23-68. The following are the strongest and weakest groups for the period ending 7/28/22. Strongest: Communications, Industrial Technology, Heavy Construction and Water Utilities. Weakest: Internet-Content, Internet-Retail, Aluminum and Oilfield Equipment. 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:

1. 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.

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

1. 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.

1. 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:

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

1. 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:

1. 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. 

1. 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.

1. 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.

1. 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:

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

1. 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.