May 3, 2024

Ahead of the FOMC Meeting, stocks struggled with inflation that came in above expectations early in the week as Employment Costs in the first quarter rose +1.2%, pushing the probability of lower yields out to the end of 2024. The DJIA tumbled 570.17 points (-1.49%) on Tuesday, while the NASDAQ dropped -2.04% as the rate on the two-year Treasury breached 5%, rising to its highest level since November before closing the period at 4.812%. The major averages wavered on Wednesday before the Fed left rates unchanged, but a less hawkish than anticipated Fed Chair Powell kicked off a rally that nearly erased the previous day's dip before a last hour fade left the different indexes mixed. Cooler heads prevailed on Thursday after Powell dismissed the likelihood of another rate hike saying he believed current policy will bring down inflation to the Fed's 2% goal and the committee was ready to move on rate cuts if needed. Equities regained upside momentum buoyed by solid earnings from Amazon (AMZ), Qualcomm (QCOM) and Apple (AAPL) and a weaker than expected jobs report on Friday helped lift the major averages for a second straight week. The market sectors finished mostly positive with Utilities (XLU) hitting its highest level since January 2023, followed by strength in REITs (XLRE), Technology (XLK) and Consumer Discretionary (XLY). Energy (XLE) was the weakest market groups as crude oil prices slipped below $80 for the first time since early March on hopes for a cease-fire between Israel and Hamas. The Financial (XLF) sector also lagged the broader market. Next week is light on economic news which should lower volatility, but several Fed officials will give speeches on policy that will keep the focus on yields. After snapping a five-month win streak in April, bullish investors were off on the right track as May got underway.

For the period, the DJIA added 436.02 points (+1.1%) and settled at 38675.68. The S&P 500 picked up 27.83 points (+0.5%) and closed at 5127.79. The NASDAQ jumped 228.43 points (+1.4%) finishing at 16156.33. The small cap Russell 2000 gained 33.72 points (+1.7%) and settled at 2035.72.

Market Outlook: The technical condition of the market improved this week despite volatile swings that whipsawed investors as the major averages finished higher for a second consecutive week. The technical indicators improved with MACD, a short-term trend measure, crossing into bullish ground for the different indexes, while Momentum, as measured by the 14-day RSI, neutral to positive but rising across the board. After struggling to hold key MA support over the last few weeks, the major averages had their sights once again set on resistance at their respective 50-day MA, which could induce more buying once crossed. While the NASDAQ managed to trade above its 50-day MA on Friday, the other major averages stalled just below that level, while getting close to being overbought. The Market Edge/S&P Short Range Oscillator (SRO) ended the period at +4.45%. That remains a red flag as traders will consider the snap back rally off the April lows an oversold bounce until the different indexes can close above that key MA resistance. Also of concern, is that the bounce in most of the market sectors has stalled below their respective 50-day MA. Only Utilities (XLU) and Consumer Staples (XLP) are trading above that resistance level. In addition, the technical indicators for the different sectors remain mixed at best, which should keep some level of caution in play for investors. Keep an eye on the 50-day MA for the different indexes and sectors for signs that this rebound is the start of a fresh leg higher. If the S&P 500 does break through its 50-day MA, 5250 becomes the target for the bellwether index.

Underlying breadth was mostly positive this week with the NYSE and NASDAQ Advance/Decline lines, leading indicators of market direction, moving higher. New 52-week highs on the NYSE outdid the new lows but remained anemic for a third consecutive week.  

Investor Sentiment remains bullish, but more investors have taken up a neutral stance. The American Association of Individual Investors (AAII) saw an uptick in bullish retail investors after the bears outnumbered the bulls the previous week for the first time since October. The pros remain cautious with the National Association of Active Investment Managers (NAAIM) Exposure Index holding around 60% equities for a third week. That exposure will increase if the major averages take out their 50-day MA.

The stock market rallied off the October lows after the Federal Reserve indicated that the war on inflation was working and that rate cuts would be appropriate in 2024. The major averages roared to new highs as some market participants predicted we could see up to six rate cuts to keep the economy growing. It didn't quite work out that way as the downtrend in inflation stalled early this year and the Federal Reserve has left rates unchanged for the last five FOMC Meetings. Fed Chair Jerome Powell this week tried to calm investors with comments that rates had likely peaked and that we could see the committee act later in the year on reducing yields. So far, it appears investors have embraced the fact that we'll have yields 'higher for longer' as despite being 'sticky', the trend for inflation remains lower. With rate cuts lurking in the background, that should be enough to keep a floor under equities and keep the bulls in control over the near-term.

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): The underlying premise of the CTI is that the market, as measured by the Dow Jones Industrial Average (DJIA), tends to move in cycles that often resemble sine waves. There are five identifiable cycles, each with different time durations at work in the market at all times. 

Currently, the CTI is Positive at +8, up seven notches from the previous week. Cycles A, B, D and E are bullish, while Cycle C is bearish. It was determined that the low the week ending 4/19 was a cyclical low leading to a reset of Cycle B which will keep the CTI in a Bullish posture through June. 

Momentum Index (MI): The markets momentum is measured by comparing the strength or weakness of several broad market indexes to the DJIA. Readings of -4 and lower are regarded as bearish since it is an indication that a majority of the broader based market indexes are weaker than the DJIA on a percentage basis. Conversely, readings of +4 or higher are regarded as bullish. 

The Momentum Index is Positive at +5, down a notch from the previous week. Breadth was positive at the NYSE as the Advance/Decline line gained 2976 units while the number of new 52-week highs exceeded the number of new lows on five sessions. Breadth was mixed at the NASDAQ as the A/D line added 3046 units while the number of new lows out did the new highs on four days. Finally, the percentage of stocks above their 50-day moving average rose to 41.8% vs. 35.6% the previous week, while those above their 200-day moving average increased to 63.0% vs. 60.1% the prior week. Readings above 70.0% denote an overbought condition, while below 20% is bullish.

Sentiment Index (SI): Measuring the market's Bullish or Bearish sentiment is important when attempting to determine the market's future direction. Market Edge tracks thirteen technical indicators listed below that measure excessive bullish or bearish sentiment conditions prevalent in the market. The Sentiment Index is Negative at -2, down a notch from the previous week.

Market Posture: Based on the status of the Market Edge, market timing models, the 'Market Posture' is Bullish as of the week ending 05/03/2024 (DJIA - 38675.68). For a closer look at the technical indicators and studies that make up the market timing models, check out the tables located below. 

Industry Group Rankings: What's Hot (22) What's Not (69). Of the 91 Industry Groups that we track, 22 are rated as either Strong or Improving while 69 are regarded as Weak or Deteriorating. The previous week's totals were 22-69. The following are the strongest and weakest groups for the period ending 04/11/24. Strongest: Aluminum, Precious Metals, Metals Non-Ferrous and Heavy Construction. Weakest: Trucking, Retailers-Drug Based, Paper Products and Cosmetics/Personal Care. To review all the Industry Group rankings in the Market Edge universe, click on the Industry Group tab.

ETF Center: The top performing ETF categories for the week ending 05/02/24 were: Sector-Alternative Energy (+5.64%), Sector-Internet (+5.41%), Specialty Health (+2.70%), International-Emerging (+2.64%) and International-Ex. Europe (+2.32%). The weakest categories were: Sector-Energy (-4.48%), Commodity-Energy (-4.10%), Commodity-Blend (-3.06%) specialty Natural Resources (-1.37%) and Shorts (-1.25%). To review all the ETF categories in the Market Edge universe, click on the ETF Center tab.

By David L. Blake, CMT