MARKET REVIEW – DECEMBER 2021

Coming off the heels of a strong October, the month of November opened with the major averages surging to new record highs before the bears entered the arena. With the Federal Reserve laying out plans to begin tapering asset purchases, and the emergence of the Omicron Covid variant, the rally ran out of gas and stocks tanked to close out the month. A bevy of strong earnings, strong economic reports, and the passing of the bipartisan $1T infrastructure spending bill kicked off a rotation into cyclical and reopening stocks early as buying in material stocks like Freeport-McMoRan (FCX), Nucor (NUE), and Vulcan Materials (VMC) helped lift the different indexes to new highs. However, increasing inflation concerns due to increasing demand and supply chain issues kept upward pressure on interest rates as the Fed announced they would begin tapering asset purchases at their November FOMC Meeting. By the middle of the month, the Dow Jones started to tumble as it posted negative on 7 out of 9 sessions and lost 1,064.09 points (-2.9%) on slowing growth concerns amid new threats of shutdowns in Europe due to rising Covid-19 cases. As Thanksgiving drew near, the market tried to rebound riding the retail wave as better-than-expected earnings from the likes of Home Depot (HD), Lowes (LOW), TJX Companies (TJX) and Macy’s (M) sent the stocks sharply higher to post new all-time highs. Big cap tech shares and semiconductors also surged to new highs as Microsoft (MSFT), NVIDIA (NVDA), Apple (AAPL), Advanced Micro Devices (AMD) and others helped lift the NASDAQ and NASDAQ to fresh records. However, that rally faded as global markets were slammed after reports of a potentially more dangerous Covid variant was spreading in South Africa, prompting immediate travel restrictions abroad and fears of additional shutdowns. The new Omicron variant caused the DJIA to drop more 905.04 pints (-2.5%) after the Thanksgiving holiday, its worst single day performance since October 2020. A one-day snap back rally where the market recovered half of the Black Friday drubbing, got clobbered again on the last day of the month following testimony by Fed Chair Jerome Powell that it was time to remove ‘transitory’ from inflation rhetoric. Losses continued to accelerate as Powell told Congress that persistent inflation will likely cause the Central Bank to speed up the tapering of the asset buying program and is likely to raise interest rates sooner than later. Crude oil prices which had surged to a seven-year high at the end of October reversed course in November and finished at a three-month low on demand concerns derived from slowing growth and travel restrictions. Most of the sectors in November were lower, led down by Communication Services (XLC), Financials (XLF), and Energy (XLE), while Technology (XLK), Consumer Discretionary (XLY) and Materials (XLB) outperformed, ending green. The DJIA posted five new all-time highs at the start of the period but ended down 1335.84 points (-3.73%) and settled at 34483.72. The S&P 500 posted seven new all-time highs before falling apart and falling 38.38 points (-0.83%) and finished at 4567.00. The DJ Transportation Index posted a new 52-week high for the first time since May to start the month before collapsing and giving back all the gains as it lost 63.43 points (-0.40%) and settled at 15843.15.     

The Nasdaq and NDX 100, proxies for technology and growth names, were the only two indexes that finished the month in positive territory. However, they weren’t immune to losses brought on by the Omicron variant. Scarcity of semiconductors continued to drive up the price for chips as the Philadelphia Semiconductor Index (SOX) outperformed, surging +11.07%, led by Qualcomm (QCOM +35.72%) and Advanced Micro Devices (AMD +31.72%). Biotech companies however, fell short for a third consecutive month. The iShares NASDAQ Biotechnology ETF (IBB) tumbled -3.37% during the month, as AstraZeneca (ASTA -12.1%) was the biggest decliner and the ETF is down -12.5% since its September high. The NASDAQ was able to post eight new all-time highs, mainly during the beginning of the period, and eked out a small gain of 39.30 points (+0.25%) to finish at 15537.69. The small cap Russell 2000, which had been range bound for several months, finally broke out to new all-time highs before crumbling towards the end and breaking below its 200-day MA and becoming the largest percentage loser, as it finished down by 98.28 points (-4.28%) to end at 2198.91.

MARKET OUTLOOK

The technical condition of the market deteriorated in November as the major averages battled a rise in new Covid cases and grappled with the beginnings of tightening monetary policies by Central Banks, leaving the majority of the indexes with losses for the month. The technical indicators are mostly negative for the different indexes with short-term trend gauges now in bearish territory. Momentum, as measured by the 14-day RSI, had slipped into negative territory for several indexes but remained neutral for the S&P 500 and NASDAQ. The DJIA and small cap Russell 2000 ended the month oversold by several measures with stochastics in single-digits and look overdue for at least a relief rally as we head into December. The Dow Jones broke below key moving average support levels and flirted with its 200-day moving average (MA), while the small cap Russell 2000 cracked below support at its 200-day MA. The S&P 500 and NASDAQ fared better staying above key support at their respective 50-day MA. Positive divergence was seen in the outperformance of the Philadelphia Semiconductor Index (SOX) which closed November just below its all-time high and could help lead a market turnaround. Several sectors also fell below support areas as November closed showing growing weakness in the market with Communication Services (XLC), Energy (XLE), Financials (XLF) and Industrials (XLI) trading below their respective 50 and, or, 100-day MA. Underlying market breadth also deteriorated with the NYSE and NASDAQ Advance/Decline lines showing most stocks were under distribution, while new 52-week lows were outnumbering the new highs on both exchanges as the month ended. This negative divergence in breadth has been evident for several weeks accenting that the major averages were susceptible to further weakness despite flirting with new highs. Bullish Investor Sentiment had reached extreme levels early in November, but that enthusiasm was tempered as the month wrapped up. Although the institutional investors were still overly bullish going into the last week of November, retail investors were growing more wary. The American Association of Individual Investors (AAII) survey showed bulls had fallen from 48% midmonth to 33.8%, below the historic norm of 38% bulls. The National Association of Active Investment Managers (NAAIM Exposure Index showed the pros were still on margin at 103.1% exposure to equities.

It's too early to say that Santa may be out on Covid protocol, but investors counting on a yearend rally may need to take a wait-and-see approach as we head into December. Market participants were already concerned that shutdowns in Europe could slow growth and Friday's report threw more fuel on the fire. With a lack of available news on the new strain coming out and the Federal Reserve possibly increasing its tapering of asset purchases, it's prudent for investors to see what unfolds before jumping back in and looking for bargains. The stock market usually overreacts both higher and lower to news however, and investors need to have a list of quality stocks that could be bought on market weakness. December is historically one of the strongest months for the market and the Market Edge/S&P Short Range Oscillator (SRO) showed the market was very oversold at -6.48% as the month ended. Historically that low of a reading has led to a bounce and could be signaling that Santa could deliver and surprise investors if he doesn’t crash into that ‘Wall of Worry’ on the way!

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 Positive at +1, down 2 notches from the previous month. The counts for Cycles C, D and E are bullish while counts for Cycle A and B are bearish.

The following are projected CTI readings through the week ending 12/24/21.

** 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

MOMENTUM INDEX: Neutral

As of the close on 11/26/21, the Momentum Index is Neutral at +2, down three 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: +6.6%

The broader market indexes are up on average +6.6% from their July 2021 closing lows vs. +3.6% for the DJIA resulting in the Neutral +2 reading. Breadth was mixed during the month at the NYSE as the Advance/Decline Line decreased by 5123 units vs. a gain of 6167 units in October while the number of new 52-week highs surpassed the new lows on 14 of 21 sessions. Breadth at the NASDAQ was negative as the A/D line lost 8940 units vs. a gain of 2942 units in October, while the number of new lows surpassed the new highs on 11 out of 21 sessions. Finally, the percentage of stocks above their 50-day moving average declined to 55.1% from 60.4% while those above their 200-day fell to 57.2% vs. 60.2% the previous month. Readings above 70.0% denote an overbought condition.

SENTIMENT INDEX: Negative

The Sentiment Index for the month ending 11/26/21 is Negative at -1, down one notch 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 (0.06 vs. 0.07) is Bullish. NYSE short interest was down -1.7% and 2.9 days of average volume for the period ending 11/15/21 vs. being down -1.0% and 2.6 days average volume to cover at the end of October. Short interest at the NASDAQ was down -4.4% and 1.9 days of average volume mid-November vs. a +0.5% increase and 2.6 days average volume to cover on 10/30/21), the Bullish-Bearish Investment Advisors Ratio (2.6 vs. 2.1), the AAII Bull-Bear Ratio (0.9 vs. 1.3), the Fear and Greed Index (66.8 vs. 70.8, Percentage of Bearish Investment Advisors (21.7% vs. 23.8%) and VIX, a measurement of fear in the market, (23.91 vs. 16.26) are Neutral. The Total Put/Call Ratio (0.89 vs. 0.85), Percentage of Bullish Investment Advisors (56.6% vs. 48.9%) and NAAIM Exposure Index (103.1 vs. 103.4) 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 outflows of $465 million for the reporting period ending 10/27/21 compared to inflows of $15.1 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 7/30/2021 (DJIA – 34935.47). The Market Posture is expected to remain bullish through the end of November 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 11/25/21 were: Sector-Energy, Sector-Financial, Shorts, Commodity-Energy, Commodity-Base Metals and Commodity-Blend. The weakest categories were: Commodity-Precious Metals, Sector-Internet, Sector- Alternative Energy, Sector-Technology and Bond-International. To review all the categories in the Market Edge universe, click on the ETFs tab.

Industry Group Rankings: What's Hot (69) – What’s Not (22)

Of the 91 Industry Groups that we track, 69 are rated as either Strong or Improving while 22 are regarded as Weak or Deteriorating. The previous month’s totals were 70-21. The following are the strongest and weakest groups for the period ending 11/25/21. Strongest: Advertising, Auto Manufacturing, Semiconductors & Related and Consumer Services. Weakest: Medical/Biotechnology, Internet-Software, Internet Services and Media-Cable Publishing. 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.