Breadth on the NYSE was negative last week, not by much, but it still is a sign of a tired market. Transports have been one of the best indicators of economic strength and they have been diverging, suggesting economic weakness. So far, our forecast on TLT has been reasonably accurate. We have rallied to the 90-area and started to roll over. Now we will see if the rest of our forecast works, and rates rise into October.
We continue to think that there should have a short-term pullback in stocks and bonds on FED news, but that if this occurs it should be a buying opportunity. We remain bullish through the end of the year.
These indexes look ripe for a short-term pullback. QQQ is overbought but does not have the same sort of topping signs. We think Japan is a new secular bull market that can advance for years.
Stocks are trading a little better than we expected but we still expect some pullback into October followed by a sharp advance into yearend. We have mentioned that TLT was hitting the point of maximum danger when the weekly stochastic became overbought and sell recycled. With this rally, it is very close.
We are bullish for yearend but think a nice dip could occur which would set up a better entry on the long side than you could get on the short side. We should mention that we are now in what could be the riskiest part of the year for Treasury Bonds. Watch our interest rate indexes carefully. The McClellan Oscillator suggests that in spite of some good days last week, momentum is slowing.
In spite of last Friday’s action, we have no major change in our outlook, which is to be cautious on the equity markets into late September/early October. We acknowledge Powell’s speech but note that longer-term bonds advanced very little – in other words our concern about a rise in long-term rates remains.
We are not selling leading securities, as we think the market will make new highs into the end of the year after this dip. Seasonal strength in petroleum is ending at the end of August. We believe Japan is starting a new secular bull market.
Still looking for a short-term peak in the next few weeks. Our volatility indicator is suggesting an up-tick in volatility is coming. Several indicators for TLT have set up and we now have enough of a buy signal to buy it here with an objective of 92 that should be hit in the next couple of weeks.
We will continue to sell underperforming positions, and prepare for a more severe pullback, and while we still believe that should start later in August, but if we are a few weeks wrong about the timing this pullback could be starting now.
We have suggested beginning to put together a sell list of underperforming names, and we discuss some Dividend Stock ETFs as a way of getting a bit more defensive. Some of the more defensive sectors are starting to do better.
SPY has hit our target at 630, and while the market still looks higher, we should now look for points to sell underperforming stocks, or at least parts of position in them. Watch GLD – staying below 302 would suggest a peak in gold. SLV may be starting a blow-off top and right now the risk of a peak is increasing but it is not there yet.
We still think the end of the year will be higher than this, but we should be looking at underperforming holdings with a view towards building a sell list. A move above 52 on TYX, and 50 on TNX heightens the risk of an advance in interest rates that could surprise the markets.
Stocks continue to look like typical options expiration shenanigans. One thing that is a concern is the performance of TLT and TYX. Watch TYX – a move above 52 would suggest problems for our thesis of the market rallying into mid-August.
We like the trading, with a pattern of down early in the week and a rally into the end of the week. We would watch CPER to make sure it holds the breakout.
IJR and IWM are trading well, and still look like Head and Shoulders breakouts. The only real concern we have is that TLT is weaker than we would like to see.
