There has been enough improvement in the internal indicators to suggest an imminent rally. Momentum indicators then suggest another decline is likely after this rally (assuming it occurs). The bond market is very interesting here, as it is suggesting a short-term peak in inflation has likely occurred. Several friends in the oil business in Texas have indicated to me that there is little to no incentive to drill, even though some of the onerous environmental regulations have been relaxed.
This is the sort of trading we want to see to suggest a rally can last for more than just one day. This rally could make it to 420 on SPY or so and then fail. Failure at 410 would be a concern, as would a new low before hitting 410. MUB made a new low today, and TLT was down as well. This suggests interest rate pressure is not going to abate, as we thought it might this week.
The trading is a bit better, and we think a trading rally should start from here. This could reach as high as 430 on SPY. If/when the market becomes overbought it should decline once again, and this could lead to the decline we are looking for, into June.
With Investor’s Intelligence at 39% Bears, and the put call remaining elevated, we are finally seeing some decent fear. We continue to suggest dollar cost averaging into models at this time.
Stocks are trading in a way that we call going “aggressively nowhere.” Dividend stocks remain strong. Advisors should be starting dollar cost averaging attractive issues with strong relative performance.
Equity market indicators continue to suggest we look for a low in the June timeframe. Much of the time the market bottoms during a recession, and not at the end. We would consider adding to the small cap parts of models in this area.
Unless reversed again on Wednesday, this should put to bed the idea of a short-term Head and Shoulders bottom on SPY. Small cap is acting better and small cap Value better still. TLT back below 120 would be a concern.
Holding the SPY 420-area would suggest some more consolidation with resistance around 450. Since we are looking at the possibility of a low in June it is likely that the market will attempt a rally here and get short-term overbought before the final low. All of these soft commodities suggest that we should see a bit more inflation into the third quarter, at least.
Stocks have rallied this week as we indicated they might, and could move a little higher, but should run into some trouble at 447 to 450 on SPY, and 351 to 353 on QQQ. Again, we note that these sort of dramatic up days are often signs of a bear market rally.
While this is still intermediate-term negative, there are a couple of favorable patterns that could spark a short-term rally. We would not be surprised to see an up week. The question we have to ask is why, if optimism is as low as the AAII survey suggests, has there been no panic put buying? We think the reason is that people continue to feel that when the war is over ll will be well, in contrast to our view is that the problems we are having are not caused by the war. If Municipal Bond ETFs go much lower, the downside target will be the actual 2020 lows.
As we expected, stocks have started the week down, but may see some relief rally into the shortened holiday week. Our idea that there may be some earnings trouble in the second quarter has merit. You can buy the metals and metals stocks in here but have some risk management in place.
SPY challenged 450, now resistance as mentioned in last week’s report, and was turned back. For short sellers, two closes above 450 would be an excellent benchmark. Remember to stick to benchmarks for trading positions as this market is volatile and difficult to forecast.
Quarterly indicators have corrected, but not quite enough to flash an “all clear”. The Accumulation Model on GLD has continued to improve, as we mentioned several weeks ago. This suggests that GOLD and the gold stock ETFs should continue to work into the end of the second quarter.
This is a strange market to us as there has been little confirmation on the part of indicators that normally mark short and intermediate-term bottoms. what to do with overweights in some of the tech names? We would still rebalance those names.
What seems to be happening is that some of the severely oversold larger cap names are rallying – and these continue to be major components in the indexes, but second tier growth names are not doing as well. New leadership in Staples, Materials, and Healthcare continue strong.
So far, things are a bit stronger than we expected, but it seems to be high relative strength names that are rallying, and we do not believe this rally will be up through the end of the week.
Of concern is that we had more new lows than the week before, and half the new highs. This is an unusual way to start a broad-based advance off a bottom. It is probably time to buy select tech stocks that are showing relative strength as the QQQ has corrected around 22% from top to bottom and we have been looking for 30% or so as a maximum drawdown.
This sort of action should continue through Friday, and we would use this to continue to shift money from high growth names into more dividend plays. All of the daily stochastics for Energy ETFs are in sell mode and have not recycled, but sharp drops in big bull moves are generally bullish.
Internal indicators continue to deteriorate, creating a backdrop of risk even if the market can rally this week. Failure to have an up week this week would likely lead to more downside, and right away.
