We are starting to see some earnings downgrades from the fundamental community – and these are not affecting the market much. QQQ Accumulation Model remains the weakest, and because of this, we remain concerned about the Tech sector. We advocate shifting some money into growth areas that are not in Tech. Our favorite speculation is Biotech.
Down this week into the end of the month would set up another summer rally attempt from this area and would set up the quarterly indicators in a pattern that would suggest the first part of a low in equities for 2022. We now believe it is time to (FINALLY) add some “growth positions” to portfolios.
If we continue down this week, then we will start looking for signs of a tradable low, which we believe will occur in July if the economy is in a technical recession by the end of the second quarter. Remember that in most cases, sharp drops in strong uptrends are bullish. We would add to oil stocks on this drop.
We believe is adding things that have good relative strength with a view toward a better second half of 2022. Prices have fallen a bit more than we expected this week, but we are close to Stochastic recycles. We like DWAS because small cap performs well as you come out of a recession.
Internal indicators have started to weaken once again. Small cap almost always outperforms coming out of a recession. Markets often bottom during a recession and not when it is over.
Some indicators are becoming overbought, however, especially daily stochastics, and the McClellan Oscillator. This suggests a short-term peak by the end of the week, per our forecast, is certainly possible. So far FVX has made a lower high but above 31 would suggest much higher rates short-term, and this would concern the equity markets.
Internal indicators continued to improve last week, in spite of a down close to the week. Honestly, we are surprised that we have not seen any sort of panic given the pervasive negative commentary in the news and with investors we speak with.
There was enough momentum on the downside so that this should have a retest – and this sort of formation should have the retest by the end of June. One concern about this rally is that call premiums are really high, suggesting a near term pullback, and SPY could easily pull back to 404 to 405, before having another surge. Biotechs are the most interesting speculation in this area and may indeed be the most interesting speculation for the remainder of 2022 and into 2023.
The most important thing we are seeing that bodes well for an equity rally that could last even longer than this week, is the action in MUB. One way to take advantage of both a short-term May/June rally, as well as a June Low, is PDP.
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.
