MARKET REVIEW – JANUARY 2023

The major averages rolled into December on multi-month highs but a wave of better-than-expected economic data and a strong jobs report sent yields higher and stocks lower. The DJIA dropped 993.43-points and the NASDAQ lost -4.4% over the first few sessions as recession fears grew. The different indexes were able to bounce back midmonth as investors regrouped and cheered a lower Consumer Price Index (CPI) that showed inflation cooled in November, sending the Dow Jones on a 707-point spike and the NASDAQ soaring +3.5%. The gains faded however as the December FOMC Meeting concluded with a 0.50-point rate hike as expected, but a more hawkish statement from Fed Chair Jerome Powell. The Committee raised their target for the Fed Fund Rate to 5.1% and promised rates would remain higher for longer to rein in inflation. That triggered another selloff in stocks as interest rates ticked higher once again, feeding recession fears. The major averages went on a four-day bender leaving the DJIA down another 1351.10-points and selling in big cap technology shares sent the tech heavy NASDAQ down another -6.3%. Yields continued to climb as market participants kept an eye out for a Santa rally, with the 10-year treasury rate closing the month at 3.8%, near a seven-week high. Alas, despite strong earnings from Nike (NKE) and FedEx (FDX) and a tick higher in Initial Jobless Claims as the month was ending, Santa was a no show. The market sectors were all lower with defensive groups Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP) showing relative strength. Fears that the Fed’s policy would slow growth and push the economy into a recession hit growth sectors hard with Consumer Discretionary (XLY) sinking -11.40%, followed by sharp losses in Technology (XLK), Communication Services (XLC), Materials (XLB) and Financial (XLF). The Energy (XLE) sector nudged lower despite crude oil prices moving higher on a price cap on Russian oil by the European Union, but still ended the year up a staggering +64%. After sliding as low as $70.50 a barrel, crude oil finished the year at $80.51. Back and forth trading the last days of December and 2022 left the DJIA down 1442.52 points (-4.17%) at 33147.25 closing out the year with an -8.8% loss. The S&P 500 dropped 240.61 points (-5.90%) to 3839.50 in December and the bellwether index finished the year down -19.4%, its worst year since 2008.  Finally, the DJ Transportation Index plunged by 1257.29 points (-8.58%) this month and declined -18.7% for the year.    

The Volatility index known as VIX, finished the year in the 21-area, following a climb to the 33 area in mid-April. The yield on the 10-year T-Bill finished the year at 3.87% while the 2-year Treasury landed at 4.41% with the spread near its highest level since 2007. Wall Street’s three main indexes booked their first yearly drop since 2018 as an era of loose monetary policy ended with the Federal Reserve’s fastest pace of rate hikes since the 1980s. The annual percentage declines for all three indexes were the biggest since the 2008 financial crisis, largely driven by a rout in growth shares as concerns over Fed's rapid interest rate hikes boost U.S. Treasury yields.

The NASDAQ fared worse in December as higher rates upended growth and technology stocks. Overweighted big cap tech and semiconductor shares torched the NASDAQ as valuations were cut sending several tech favorites to new 52-week lows. After holding up better than its peers, Apple Co (AAPL) tumbled -12.2%, Nvidia (NVDA) dropped -13.6% and Advanced Micro Devices (AMD) lost -16.5% of it value. Leading the list of losers, however, was a -36.7% crash in EV maker Tesla (TSLA), erasing more than two-years f gains. The Philadelphia Semiconductor Index (SOX) flamed out with -10.4% drop. After posting positive for two straight months, the NASDAQ ended December with a loss of 1001.52 points (-8.73%) at 10466.48 and down -33.1% for the year. That’s the worst performance for the NASDAQ since a -41.89% dive in 2008. The small cap Russell 2000 slipped 125.25 points (-6.64%) and finished at 1761.25.

MARKET OUTLOOK

The technical condition of the market deteriorated in December leaving the major averages lower. The technical indicators for the different indexes are in negative territory with MACD, a short-term trend gauge, bearish and Momentum, as measured by the 14-day RSI, negative and slowing. While the DJIA is trading above its 200-day MA, a positive, it was unable to hold support at its 50-day MA as December came to a close and continues to struggle just below its descending trend line off the highs of the January-October selloff and below its August high. If the blue-chip index can’t hold the current level next support is 32200-32450. The S&P 500 is trading below its 200, 100 and 50-day MA and briefly broke support at 3800 the last week of the month before closing December back above it. A break below that level would open the door to a move down to 3700-3720 over the near-term followed by support at 3570. The NASDAQ is below its 50-day MA and remains in a range between 10200 and 11400 that has been in place since September. The NASDAQ traded down to the bottom of that range and flirted with its October low late in the month and a break of that level targets 10080. Market technicians look for positive divergence at market bottoms from the secondary indexes but so far, they aren’t providing any support or showing positive divergence suggesting we could see more market weakness  in January. However, the DJ Transportation Index and Philadelphia Semiconductor Index did find support at their 50% retracement level of the October-December rally, a small win for the bulls. The small cap Russell 2000 has retraced more than 50% of the October-December rally and could have 1675 in its sight, another -4.5-5% downside.

Underlying breadth remains weak, but the NYSE and NASDAQ Advance/Decline lines were little changed the last two weeks of December which is a sign of some positive divergence. This suggests that investors are buying stocks on dips, a positive going forward. New 52-week lows outdid the new highs on both exchanges but contracted somewhat, also suggesting investors are looking for oversold bargains. Investor sentiment improved a bit but remains bearish. The American Association of Individual Investors (AAII) survey shows only 26.5% of retail investors, below the 38.0% historical average, and the National Association of Active Investment Managers (NAAIM) Exposure Index ended the year at 43.5% equity exposure, a neutral reading.

After a miserable 2022 for stocks, investors are still facing a Fed that promises higher rates for longer, a possible recession on the horizon, and earnings estimates that continue to inch lower as we move into 2023. Hard for investors to get excited about the stock market with all that going on! However, there are signs that market gurus could be just as wrong about the coming year’s collapse as they were about last year’s possibilities. For one, over the last 50 years, the S&P 500 has only been down two-years in a row twice! In addition, Chief Market Strategist, Ryan Detrick of LPL noted recently that following a negative midterm election year, which we’ve just endured, the S&P 500 finished the following year higher on all eight occurrences, with an average yearly return of +24.6%. Warren Buffett once said, be “fearful when others are greedy, and greedy when others are fearful.” While stocks are likely to struggle in January and investors may want to stay in cash, don’t let the Bears keep you out of the market. If history repeats itself, 2023 should belong to the Bulls.

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 +6, down 2 notches from the previous month. The counts for Cycles B,C and D are bullish, while Cycles A and E are bearish.

The following are projected CTI readings through the week ending 1/27/23.

** 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 2020-2023

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

MOMENTUM INDEX: Negative

As of the close on 12/30/22, the Momentum Index is Negative at -2, down 2 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: +8.0%

The broader market indexes are up on average 8.0% from their October 2022 closing lows vs. +15.4% 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 5816 units vs. an increase of 5626 units in November while the number of new 52-week lows topped the new highs on 17 of 21 sessions. Breadth at the NASDAQ was also negative as the A/D line decreased by 8461 units vs. a gain of 721 units in October, while the number of new lows surpassed the new highs on all but one session. Finally, the percentage of stocks above their 50-day moving average dropped to 46.4% from 76.4% while those above their 200-day moving average fell to 39.1% vs. 46.3% from the previous month. Readings above 70.0% denote an overbought condition

SENTIMENT INDEX: Bullish

The Sentiment Index for the month ending 12/30/22 is Positive at +3, up five 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 (-2.47 vs. -1.98), the Percentage of Bullish Investment Advisors (37.5% vs. 41.7%) and AAII Bull-Bear Ratio (0.6 vs. 0.7) are Bullish. NYSE short interest was up +0.5% and 2.7 days of average volume for the period ending 12/15/22 vs. being down -2.3% and 2.6 days average volume to cover at the end of November. Short interest at the NASDAQ was up +0.6% and 2.5 days of average volume mid-December vs. a +0.7% increase and 2.9 days average volume to cover on 11/30/22.  The Bullish-Bearish Investment Advisors Ratio (1.1 vs. 1.4), the Percentage of Bearish Investment Advisors (33.3% vs. 30.5%), the NAAIM Exposure Index (65.0 vs. 53.9), the Fear and Greed Index (35.6 vs. 63.0), the Total Put/Call Ratio (1.27 vs. 1.03) and the VIX, a measurement of fear in the market (21.7 vs. 20.58) 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 December had outflows of $48.4 billion compared to outflows of $2.2 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 10/21/2022 (DJIA – 31082.60). 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 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 12/29/22 were: Specialty Financial, Specialty Communications, Sector-Telecom, Commodity-Agriculture and International-Emerging. The weakest categories were: Sector-Alternative Energy, Specialty Technology, Bond-Government Long Term, Bond-Corporate Invest Grade and Growth-Large Cap. To review all the categories in the Market Edge universe, click on the ETFs tab.

Industry Group Rankings: What's Hot (67) – What’s Not (24)

Of the 91 Industry Groups that we track, 67 are rated as either Strong or Improving while 24 are regarded as Weak or Deteriorating. The previous month’s totals were 88-3. The following are the strongest and weakest groups for the period ending 12/29/22. Strongest: Metals-Non-Ferrous, Oilfield-Equipment, Precious Metals and Retailers- Apparel. Weakest: Internet-Software, Transportation Equipment, Advertising and Automobile Manufacturing. 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.