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.
It is possible that Tuesday’s action was “pumping the brakes” and a setup for a rally. If this is the case, SPY could still challenge the 440-area. If we do not see a rally attempt here, then it is likely we drop sharply and test the 380-area on SPY. A break of 35 on XLF would target the breakout at 30. A move back above 38 would repair this chart.
Targets for a bounce are from 440 to 450 or so, just as they were on the last bounce. Areas on the QQQ to watch are 351, and it could move as high as 372 if this bounce is robust. China will take some time to recover, and there are better charts in Asia.
Always remember that in many instances big up days (such as the +800 Dow up day) mostly happen in bad markets. We would be concerned by an up open that then turns down and exceeds Tuesday’s low for longer than one hour – that would suggest continued downtrend.
What was the quality of that reversal from a technical perspective? The short answer is – not good. Watch stocks like FCX and NUE as they have continued to outperform most of the Tech sector.
The action remains such that it is correcting a long-term overbought condition, and that overvalued sectors are coming in. We would look for a test of 442 on a bounce and would start to add back hedges there.
We still have strong concerns about performance in the second quarter, especially in the technology sector, and other areas heavily weighted in MGK. If the market corrects, as we believe it should, then XLB, XLP, dividend ETFs should outperform.
We continue to look for a move on SPY (SPDR® S&P 500 Trust) to the 458 to 462 level. Our big concern is that GLD advances on stochastic recycles, but then falls quickly when overbought – which is a function of negative accumulation.
Internals did not improve much on last week’s rally, so we still have concerns when the next short-term overbought readings hit. The good charts seem to be clustered in what passes for “Value” stocks in this environment.
