We continue to rate this market a hold as we expect a rally into the election after our projected pullback. The move in small cap relative to large cap is real and supported by at least some accumulation.
Note the formation on QQQ looks a bit like a short-term Head and Shoulders top, with an objective of 450 or lower (that area is good support, though). TLT below 91 would suggest a move down to 85 at least, and possibly lower. This would be a surprise to the markets, and to me as well, but the technical indicators suggest this is possible.
On last Thursday’s call we suggested moving new money into value and smaller cap names, and this still seems prudent. Be ready if rates start to go in the “wrong” direction. If you are in the Chinese market, keep risk management in mind.
While we are not surprised to see the market up at the beginning of the week on bank earnings and such, breadth and small cap have been strong enough that this may be one of those cases, although to be sure we want to see the end of week numbers. We are noticing that sectors that performed well after Trump was elected in 2016, such as XLI and XLV, are performing well now. One of the keys to this rally is the performance of TLT and the prospect for rate cuts.
Small Cap sprang into life, a bit of a surprise. Put/Call Indicator, While not horrible, these numbers also are in the area that has marked short-term peaks over the last few years.
We continue to look for some corrective action starting here in July, and running into a low before the election, with a rally into the election. This is a newsy week, with bank earnings on Friday. For us, the most important news comes at the end of the week, when we see bank earnings as well as Delta and Pepsi.
Of interest to technicians is that we have had negative weekly breadth on the NASDAQ since May 24th. This should be a very interesting, and pivotal week. Watch the Yen, it could start a surprising rally from this area.
We ran Accumulation Models on the stock indexes and even with June’s strength, the SPY and QQQ models are diverging from their indexes. We continue our discussion of China with a look at Chinese Small Cap. Spoiler alert – it does not look good!
I think the key for us is that we are holding investment positions, have sold trading positions, and look for some choppiness and correction – although we may have made a mistake in that July 4th week is often up. NVDA has not yet tested our support area of 116 or so, but it did break 120 before a solid bounce into resistance, which is from 127 to 130 on a short-term basis.
Last week was the fifth week of negative weekly breadth for the NASDAQ. Assuming we are right in a short-term correction, we would look for SPY to test the 525 to 520 area where we would look to add positions back again on a short-term buy signal.
As we said on last Thursday’s call, caution flags are out. This could be a strange week, as there is a holiday in the middle of the week as well as the monthly option expiration on Friday.
TLT has held the short-term support mentioned in the weekly and has started to advance once again. This should cause a rally in KRE, which is trading weaker than we expected.
While we still see some divergences and signs of exhaustion, unless SPY trades below 453, the trend remains short-term up. Still, caution is indicated. We do not expect big problems this year, but 2025 is a different story, and we should be discussing the possibility of a tough market after the election, with clients.
If the reason the market has been choppy is interest rates, we should see prices up. GLD is trying to hold support in the 215 to 214 area short-term. Failure here would spark a test of the 210 area and below that 200.
We have daily recycles on MDY and IJR, and SPY has turned up very close to a recycle. DXY has layers of resistance from 107 to 110, and above this (which we ultimately expect) would suggest another advance that could exceed 115.
We ran our Accumulation Models on SPY and QQQ, and somewhat surprisingly they are a bit weak, so it would not be a surprise to see a bit of correction over the next few weeks.
One thing that is interesting about this phase of the rally is that it has spread to some defensive sectors, a bit of a surprise. Bonds are at key levels, as TLT tested the 92 resistance, our second target, and has failed so far. EEM has started to perform well as it has a high weighting in China and Taiwan.
The market should be choppy to up into the end of May/early June or longer. TLT is still trading in the 90-area resistance and next resistance is 92 or so. Failure at that level could end this stock rally early, so watch TLT.
