Story

Stocks Remain Cautious Ahead of Federal Reserve's Hawkish Stance

On The Edge (Monthly)

MARKET REVIEW – APRIL 2022

A slew of headwinds in form of a hawkish Federal Reserve, hot inflation and war in Ukraine upended what is a historically strong period, as April notched the worst month for stocks since the start of the pandemic. The major averages got off to a moderate start as news that Tesla's Elon Musk had taken a 12% stake in Twitter (TWTR), gave a boost to tech and growth names before Fed Governor Lael Brainard stepped in with comments that the Fed would begin reducing its balance sheet more rapidly in the month of May. The news sent yields and interest rates soaring and took all the major averages below their respective 100-day MA but still managed to hold key support areas. Additional remarks from Federal Reserve members, where they admitted that the interest rate policy is behind the curve, further rattled investor sentiment and traders rushed into defensive sectors as earnings season rolled in. During the middle of the month, mixed earnings, a hot CPI reading and rising Covid cases in China led to a 3-day selloff for both the S&P 500 (-102.76 points, -2.28%) and NASDAQ (-525.73 points, -3.8%), as both indexes tested support at their respective 50-day MA while the DJIA was holding support at its 100-day MA. From there the market rebounded slightly and recovered some of the losses on sound earnings beats by Consumer Staple bellwethers, Johnson & Johnson (JNJ) and Proctor & Gamble (P&G). However, Fed Chair Jerome Powell's comments poured more cold water on the market that the Fed was ready to raise rates by 0.50 basis points in May and June to battle inflation. The news led the 10-year Treasury to new pandemic-era highs, touching 3%, as stocks rolled over below key support areas. Later in the period, not even Elon Musk's revised buyout of Twitter could lift stocks as slowing global growth concerns and a rising U.S. dollar to a 2-year high, was beginning to weigh on commodities. It went from bad to worse, as disappointing earnings from Boeing (BA) and Alphabet (GOOG) led to more selling in the market as both the S&P 500 and NASDAQ retested the lows set back during February/March of this year. In the end, selling pressure was persistent following another hot inflation reading and Amazon (AMZN) dropping by -14% following its first quarterly loss in seven years, as both S&P 500 and NASDAQ broke below the Feb/March lows and closed out a disastrous month. Consumer Staples (XLP) was the only sector to post positive results during a difficult month, while Communications Services (XLC), Consumer Discretionary (XLY), Technology (XLK) and Financials (XLF) all declined more than -12% during the period. The DJIA, which endured a five-week losing streak, tumbled 1701.14 points (-4.91%) and settled at 32977.21. The S&P 500 also posted a four-week losing streak and wrapped up its worst month since March 2020 by losing 398.48 points (-8.80%) to finish at 4131.93.

 

Both the NASDAQ and NDX 100, never got on the right footing as technology and growth names endured four straight weeks of losses and the NASDAQ posted its worst monthly performance since October 2008, when the U.S. economy was in the throngs of the financial crisis. The Philadelphia Semiconductor Index (SOX -14.9%) got pummeled during the month, led by steep losses from Nvidia (NVDA -33%) and Advance Micro Devices (AMD -28.3%).  The iShares NASDAQ Biotechnology ETF (IBB -10.5%), was not spared during an ugly month as losses by Moderna (MRNA -23.2%) and Illumina (ILMN -15.7%) led to big losses. The NASDAQ was the biggest percentage loser during the month as it sank by 1885.88 points (-13.26%) to finish at 12334.64. The small cap Russell 2000 also declined by 206.03 points (-9.95%) to end the month at 1864.10.

 

MARKET OUTLOOK

The technical condition of the market deteriorated this month as the major averages traded down throughout the month. The technical indicators for the different indexes are negative with MACD, a short-term trend gauge, in bearish territory and Momentum, as measured by the 14-day RSI, negative. The major averages are all trading below their 200 and 50-day moving averages (MA), confirming the downtrend. The different indexes finished the period oversold by several measures with stochastics below 20, and in the case of the NASDAQ in single digits. The Market Edge/S&P Short Range Oscillator (SRO) ended the month at an oversold -5.76% which historically has led to some buying from market participants. Market weakness was pretty much across the board with every sector, except for Consumer Staples (XLP), closing the month in the red. Steep losses in Alphabet (GOOGL) and Facebook parent MetaVerse (FB) left the Communication Services (XLC) sector has the weakest market group, down -16.36% on the month, while big losses in Tesla (TSLA) and Amazon (AMZN) led to the Consumer Discretionary (XLY) sector losing nearly -14.96%. Technology (XLK) and Financials (XLF) were also down double digits in April. Underlying breadth remained weak with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, continuing to lose ground, while stocks making new 52-week lows outnumbered new highs by a wide margin, matching some of the high totals of the year. Investor sentiment remains overly bearish and as the month came to a close, we saw the professionals take a step back as the National Association of Active Investment Managers (NAAIM) Exposure Index dropped to 46.3%, down from 83.4% just three weeks ago. Retail investors were also cautious with the American Association of Individual Investors (AAII) survey showing bearish investors were at their highest level since 2009, while optimism was near an all-time low at 16.4%.

 

The month opens with the FOMC Meeting getting underway on May 3-4 and to battle soaring inflation, most analysts are looking for a hawkish Fed to aggressively raise rates. As April wrapped up, the CME Group FedWatch put the chance of a 0.50-point hike at 99.1% and a 96.9% probability of a 0.50-point rise in June. Although some economists see inflation peaking here due to China's lockdown and slowing growth, the same CME group sees a 94% chance of another 0.50-point hike in July. At the conclusion of the meeting, Fed Chair Jerome Powell will give testimony on how the committee intends to raise rates, navigate a soft landing and avoid a recession. The stock market is worried that if the Federal Reserve raises rates too fast it will slam the door on economic growth and throw the economy into a recession. However, if the Fed committee sees slowing growth as a deterrent to inflation it could set the stock market up for a summer 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): Bullish

Presently the CTI is Neutral at +9, down three notches from the previous month. The counts for Cycles A, B,C,D and E are bullish.

 

Cycle

Average # Of Weeks

In The Cycle

# Of Weeks Since

Previous Bottom

Bullish Or Bearish

Connotation

A

6 +  or    -1 Week

 9 Weeks

Bullish

B

18 +  or    -2 Weeks

 9 Weeks

Bullish

C

36 +  or    -4 Weeks

 9 Weeks

Bullish

D

72 + or    -7 Weeks

 40 Weeks

Bullish

E

216 + or   -20 Weeks

 109 Weeks

Bullish

 

The following are projected CTI readings through the week ending 5/27/22.

Week Ending

CTI

Connotation

4/29/22 (Actual)

9

Bullish

5/06/22 (Projected)

7

Bullish

5/13/22 (Projected)

7

Bullish

5/20/22 (Projected)

7

Bullish

5/27/22 (Projected)

7

Bullish

** 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

 

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

07/30/21 - 01/14/21   (34935.47 – 35911.81)

DJIA Gain/Loss

+976.34

03/18/22  -  ???         (35911.81 - ???)

DJIA Gain/Loss

???

 

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  - 8/06/21    (33290.08 – 34935.47)

DJIA Gain/Loss

+1918.43

 

MOMENTUM INDEX: Neutral

As of the close on 4/29/22, the Momentum Index is Neutral at -3, down fourteen 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.

 

Prev Lows

DJIA

DJTA

S&P 500

NYSE

R-2000

NASDAQ

UTIL

A/D LINE

Mar 2022

32632.64

14523.47

4170.70

15625.93

1941.72

12581.22

902.04

+509425

4/30/2022

32977.21

14865.06

4131.93

15615.25

1864.10

12334.64

999.90

+507770

%Change

+1.1%

+2.4%

-0.9%

-0.1%

-4.0%

-2.0%

+10.8%

-1.87%

 

Average % Change of the Broad Market Indices: +0.6%

The broader market indexes are up on average +0.6% from their March 2022 closing lows vs. +1.1% for the DJIA resulting in the Negative -6 reading. Breadth was negative during the month at the NYSE as the Advance/Decline Line decreased by 9681 units vs. an increase of 2509 units in March while the number of new 52-week lows surpassed the new highs on 16 of 20 sessions. Breadth at the NASDAQ was negative as the A/D line decreased by 16314 units vs. a loss of 1176 units in March, while the number of new lows surpassed the new highs on 19 of 20 sessions. Finally, the percentage of stocks above their 50-day moving average fell to 31.3% from 54.4% while those above their 200-day moving average fell to 31.7% vs. 40.9% from the previous month. Readings above 70.0% denote an overbought condition.

 

SENTIMENT INDEX: Positive

The Sentiment Index for the month ending 4/29/22 is Positive at +5, up three 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 (-1.51 vs. -0.75), the AAII Bull-Bear Ratio (0.3 vs. 0.9), the Bullish-Bearish Investment Advisors Ratio (1.0 vs. 1.0), the VIX, a measurement of fear in the market (33.40 vs. 21.87) and Percentage of Bullish Investment Advisors (34.2% vs. 35.3%) are Bullish. NYSE short interest was up +0.1% and 3.0 days of average volume for the period ending 4/15/22 vs. being down -3.1% and 3.4 days average volume to cover at the end of March. Short interest at the NASDAQ was up +0.1% and 2.5 days of average volume mid-April vs. a -0.0% decrease and 2.2 days average volume to cover on 3/31/22. The NAAIM Exposure Index (46.3 vs. 52.7), the Fear and Greed Index (35.4 vs. 41.6), the Percentage of Bearish Investment Advisors (32.9% vs. 35.3%), and the Total Put/Call Ratio (1.15 vs. 0.93) 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, had outflows of $8.8 billion for the reporting period ending 4/30/22 compared to inflows of $11.3 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 3/18/2022 (DJIA – 34754.93). 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 4/28/22 were: Commodity-Energy, Sector-Technology, Sector-Internet, Commodity-Blend and Commodity-Agriculture. The weakest categories were: Commodity-Base Metals, Europe, Commodity-Precious Metals, Sector-Telecom and Sector-Communications. To review all the categories in the Market Edge universe, click on the ETFs tab.

 

Industry Group Rankings: What's Hot (35) – What's Not (56)

Of the 91 Industry Groups that we track, 35 are rated as either Strong or Improving while 56 are regarded as Weak or Deteriorating. The previous month's totals were 52-39. The following are the strongest and weakest groups for the period ending 4/28/22. Strongest: Coal, Steel, Food Retailers and Oilfield-Secondary. Weakest: Banks-Eastern, Savings & Loans, Internet-Financial and Media-Cable Broadcasting. 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.

 

 

 

 

 

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Market Indicators

Market Posture Cyclical Trend Index
Bullish
12
As of: 05/27/2022
As of: 05/27/2022
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Second Opinion Performance

Second Opinion Status

2968

Current Opinions
As of: 05/27/2022

76%

Long Accuracy
As of: 05/27/2022

58%

Avoid Accuracy
As of: 05/27/2022
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Market Recap - 05/27/2022

Index Close Day Change Day % Change YTD % Change
NASDAQ COMPOSITE 12131.13 390.48 3.33% -22.46%
DJ UTILITIES 1035.3 13.26 1.3% 5.56%
DJ TRANSPORT 14444.66 302.99 2.14% -12.34%
DJ INDUSTRIALS 33212.96 575.77 1.76% -8.6%
NYSE COMPOSITE 15942.62 278.62 1.78% -7.12%
S & P 100 INDEX 1878.73 45.55 2.48% -14.39%
RUSSELL 2000 1887.86 49.62 2.7% -15.92%
S&P 500 4158.24 100.4 2.47% -12.76%
CBOE MKT VOLATILITY 25.72 -1.78 -6.47% 49.02%
AMEX COMPOSITE 4286.79 89.84 2.14% 25.08%
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