MARKET REVIEW – SEPTEMBER 2022

The month of August could be best summed up as a tale of two halves as a robust rally during the first part of the month stalled at key resistance levels after Fed Chair Jerome Powell struck a more hawkish tone, cementing the worst August performance since 2015. After a stutter step as the month started major averages rallied to a four-month high, getting a shot in the arm following the passage of the Inflation Reduction Act. Also giving stocks a boost was decelerating Consumer Price Index (CPI) and Producer Price Index (PPI) reports. The major averages responded with the Dow surging by 1425.19 points (+4.2%) on seven of eight sessions. The S&P 500 managed to jump up 153.26 points (+3.6%) during the same timeframe as it looked to extend the rally off the June lows. The volatility index, known as the VIX, hit its lowest mark in three months, as it broke below the 20-handle while the Advance/Decline line climbed to its highest level since April. Just when everything seemed prime for a continuation of the rally with the major averages breaking out above the June highs, the major averages ran into stiff resistance at their 200-day MA and descending trendline from the start of the year and equities reversed course. Midmonth, the July FOMC meeting minutes stated that further tightening should be anticipated and that several members felt rates were below neutral. Nervous investors started to sell the rally as hopes of a slowing rate cycle by the Fed were quickly dashed. The CME Group FedWatch Tool moved to a 62.5% probability of the Fed raising rates 0.75-point at the September FOMC Meeting. Despite the mixed economic data and earnings reports, the stock market was in flux as attention turned towards Fed Chairman Jerome Powell’s speech at Jackson Hole. In that speech, Powell warned of ‘further pain ahead for the U.S. economy and reducing inflation is likely to require a sustained period of below-trend growth.’ From there, the Bears took the wheel and drove the market lower to the tune of a four-session losing streak with the Dow losing 1781.35 points (-5.5%) and S&P 500 hemorrhaging 823.07 points (-6.6%) to finish out a grim month in oversold territory. On the way down, the primary indexes broke support at their respective 50 and 100-day moving averages and had retraced more than 50% of the June-August rally while Treasury yields remained inverted with the 10-year T-Bill yield landing at 3.13% and 2-year T-Bill rate settling at 3.48%, a new 15-year high. Investors became extremely defensive as Energy (XLE) and Utilities (XLU) were the only sectors to finish in the plus column for the month, while riskier sectors such as Technology (XLK), Health Care (XLV) and Real Estate (XLRE) lagged during the period. For the month, the DJIA lost 1334.70 points (-4.06%) and settled at 31510.43. The S&P 500 was weaker by 175.29 points (-4.24%) to finish at 3955.00.  

The technology and growth heavy NASDAQ and NDX 100 indexes encountered much the same action as a promising rally got turned back at resistance levels and finished out the period in negative territory. The chip laden Philadelphia Semiconductor Index (SOX -9.8%) finished out the period lower as underperformances from Nvidia (NVDA -18.15%) and Marvell Technology Group (MRVL -15.38%) led the index lower. After briefly surging above resistance at its 200-day MA, the iShares NASDAQ Biotechnology ETF (IBB -2.1%), posted its first monthly loss in the last three, led down by weakness in Moderna (MRNA -18.1%) and Seattle Genetics (SGEN -12.07). After hitting a four month high earlier in the month, the NASDAQ gave back all the prior gains as it fell by 574.49 points (-4.64%) and settled at 11816.20. The small cap Russell 2000 also underperformed for the period as it declined by 41.11 points (-2.18%) to end the month at 1844.12.

MARKET OUTLOOK

The technical condition of the market deteriorated as the month of August was ending as the rally off the June lows stalled at key resistance. The technical indicators slipped back into a negative configuration with MACD, a short-term trend gauge, crossing into bearish ground while Momentum, as measured by the 14-day RSI, slowed and fell into negative territory. The selloff dropped the different indexes below key support as they dropped below both their respective 100 and 50-day MA’s. However, the market closed the month oversold by several measures with stochastics in the single digits and the Market Edge/S&P Short Range Oscillator (SRO) ending at –6.98%. A move below –7% has historically brought buyers off the sidelines, but investors looked reluctant to buy the dip ahead of the Labor Day weekend. Breadth was negative as the NYSE and NASDAQ Advance/Decline lines lost ground during the second half of the month, showing the majority of stocks are under distribution. In addition, new 52-week lows outdid the new highs on both exchanges. Sentiment is neutral but both retail and professional investors saw an uptick in the number of bears. The American Association of Individual Investors (AAII) saw bullish retail investors slip to 21.9%, which is below the historical average of 38%, while the National Association of Active Investment Managers (NAAIM) Exposure Index fell to 54.9% after reaching 71.6% mid-month.

Fed Chair Jerome Powell’s 'no pain, no gain' speech at the Jackson Hole Economic Symposium put an end to hopes that the Federal Reserve could slow rate hikes to avoid a recession or slowdown in growth to tackle inflation. Interest rates nudged higher as August came to a close with the yield on the two-year Treasury hitting its highest mark since 2007. Despite some signs that economic activity was slowing the CME Group FedWatch was projecting a 69% probability of a 0.75-point hike in September and a 60% probability of a 0.50-point hike in November. With the backing of committee members, the Federal Reserve has signaled that they will error to the side of over tightening rather than allow inflation to be prolonged into 2023. There’s a reason Wall Street has lived and died by the adage ‘don’t fight the Fed’. The Market Edge Market Posture moved to a Bearish position towards the end of August and it’s unlikely that equities are going to stage a rally any time soon as we enter September which is notorious as being one of the worst months of the year for the stock market.

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.

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): Bearish

Presently the CTI is Bearish at -1, down five notches from the previous month. The counts for Cycles A, C and D are bearish, while Cycles B and E are bullish.

The following are projected CTI readings through the week ending 9/23/22.

** 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: Negative

As of the close on 8/26/22, the Momentum Index is Negative at -4, down twelve 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: -7.4%

The broader market indexes are down on average -7.4% from their August 2022 closing highs vs. -7.7% for the DJIA resulting in the Negative -4 reading. Breadth was negative during the month at the NYSE as the Advance/Decline Line decreased by 3407 units vs. an increase of 9417 units in July while the number of new 52-week lows topped the new highs on 10 of 20 sessions. Breadth at the NASDAQ was also negative as the A/D line declined by 3453 units vs. a gain of 7173 units in July, while the number of new lows surpassed the new highs on 12 of 20 sessions. Finally, the percentage of stocks above their 50-day moving average increased to 73.4% from 67.9% while those above their 200-day moving average rose to 36.1% vs. 26.5% from the previous month. Readings above 70.0% denote an overbought condition.

SENTIMENT INDEX: Neutral

The Sentiment Index for the month ending 8/26/22 is Neutral at +2, down 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 (-1.57 vs. -1.74) and the AAII Bull-Bear Ratio (0.7 vs. 0.7) are Bullish. NYSE short interest was down -5.6% and 2.7 days of average volume for the period ending 8/15/22 vs. being up +0.9% and 3.3 days average volume to cover at the end of July. Short interest at the NASDAQ was down -3.5% and 2.4 days of average volume mid-August vs. a –3.1% decrease and 2.7 days average volume to cover on 7/31/22. The Bullish-Bearish Investment Advisors Ratio (1.5 vs. 1.0), the Percentage of Bullish Investment Advisors (45.1% vs. 38.9%), the Percentage of Bearish Investment Advisors (29.6% vs. 33.3%), the NAAIM Exposure Index (54.9 vs. 47.2), the Fear and Greed Index (46.0 vs. 37.8), the VIX, a measurement of fear in the market (25.65 vs. 21.33) and the Total Put/Call Ratio (0.99 vs. 1.04) 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, in August had inflows of $3 billion 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: Bearish

Based on the status of the Market Edge, market timing models, the ‘Market Posture’ is Bearish as of the week ending 8/26/2022 (DJIA – 32283.40). 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 8/25/22 were: Sector- Energy, Sector-Alternative Energy, Specialty Natural Resources, Sector- Basic Materials and Sector-Internet. The weakest categories were: Specialty Finance, Specialty Utilities, Specialty Real Estate, Shorts, and Sector-Telecom. To review all the categories in the Market Edge universe, click on the ETFs tab.

Industry Group Rankings: What's Hot (79) – What’s Not (12)

Of the 91 Industry Groups that we track, 79 are rated as either Strong or Improving while 12 are regarded as Weak or Deteriorating. The previous month’s totals were 72-19. The following are the strongest and weakest groups for the period ending 8/25/22. Strongest: Communications, Advertising, Internet-Financial and Pollution Waste Management. Weakest: Internet-Content, Auto Mfg, Auto Parts and Metals Non-Ferrous. 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.