The much anticipated CPI report on Thursday came in much higher at 7.5% and did stall the stock market’s rally last week. Before the report stocks were higher for the week but the concern over the report was my focus as the week started.
This was an especially important time as the major averages had mostly closed higher for two weeks after the January 24th low. Often a rebound against the current trend only last three bars so a higher close last week would have further supported the view that the market had completed its correction. This made last week’s negative performance and downside reversal even more important.
It came as no surprise after the plunge in Meta Platforms (FB) the prior week that the Nasdaq 100 Index ($NDX) was the weakest losing 3%. FB had rallied early in the week but the technical studies (see chart) showed no signs of a bottom as it was down another 7.4%. On a year-to-date basis, $NDX is the biggest loser down 12.7%.
Even the more defensive Dow Jones Utility Average ($UTIL) lost 1.9% as it was a bit weaker than the 1.8% drop in the S&P 500 ($SPX). Both the $UTIL and $SPX are showing significant losses for the year as they are down 5.7% and 7.3% respectively.
The SPDR Gold Shares (GLD) and iShares Russell 2000 (IWM) were higher for the week. GLD is up 1.7% YTD while the IWM is 9.5% lower YTD. Since the beginning of 2022, the Dow Jones Industrial Average has held up the best YTD as it is down just 4.4%.
The weekly chart of the Spyder Trust (SPY) had peaked the prior two weeks at $458.12 and $457.88 but after the CPI it dropped to close the week at $440.38. The January low was $420.76, line a, with the weekly starc- band at $418.01.There is additional support now down to the $403.10 area, line b.
On the NYSE the advancing issues led the declining issues up through Wednesday’s close but by the end of the week, the A/D numbers were negative with 1639 issues advancing and 1956 declining. The S&P 500 Advance/Decline line had edged above its weighted moving average (WMA) by the middle of the week but closed below it which is a negative sign. There is A/D line support at line c.
The volume was lower last week than it was the prior two weeks, but the on-balance-volume (OBV) has dropped back below its WMA. The OBV has important support at line d. The daily A/D line and OBV turned negative on Friday.
The Invesco QQQ Trust (QQQ) formed lower highs last week as the rebound from the January low at $334.15, line a, has failed well below the declining 20 week EMA which stands at $371.89. On a drop below the recent lows the weekly starc- band is at $323.36 with stronger support at $316.00, line b, which is 8.9% below Friday’s close.
The Nasdaq 100 A/D line has been below its WMA since January 14th but is above the two-week lows. There is more important support from April-June at line c. The A/D line is down 2.4% from its high while the QQQ is down 15%. This is an indication that the A/D line is acting stronger than prices which was also the case during the 2018 and 2020 market declines. The volume was a bit lower last week after peaking three weeks ago.
The greater weakness in the QQQ was forecast at the end of December as the monthly chart of the ratio of the S&P Growth Index (IGX) to the S&P Value Index (IVX) suggested it was completing a major top. Remember when the ratio is rising it means that growth stocks are stronger than value stocks. Conversely a declining ratio means that value stocks are stronger. So far in 2022 IGX is down 10.3% while the $IGX is down 2.1%.
The weekly chart shows that the ratio declined further last week and looks ready to test major support at line b. This is consistent with the steadily declining 20 week EMA. This chart provides a good lesson in using the weekly MACD-His.
In May 2020 the MACD-His peaked and as the ratio made higher highs until peaking out in early November it formed a bearish or negative divergence, line c. The ratio formed a double bottom in March and May of 2021 while the MACD-His formed higher lows, line d. This was a sign that the positive momentum was increasing. The MACD-His then peaked in July and in November when the ratio surged to a convincing new high and another bearish divergence, line e, was formed. The MACD-His crossed into negative territory on December 27th and shows no signs of bottoming.
Only three of the eleven S&P sectors were positive last week led by a 2.2% gain in the Energy Select while the Materials Select was up just over 1%. The Financial Sector (XLF) was just fractionally higher. The Consumer Staples (XLP) and Utilities Select (XLU), like the other sector ETFs also have positive weekly relative performance and are acting stronger than the S&P 500.
The threat of a Russian invasion of Ukraine combined with last week’s reversal in the stock market does not create a favorable environment for new buying this week. Conflict with Russia could cause a 6-10% downdraft in the stock market which should be brief if the conflict is not prolonged.
The majority of the economic data that I follow plus the longer-term technical outlook for the stock market does not indicate a bear market or recession. Therefore I think many stocks and ETFs that some are dumping now will be higher in the second quarter.