We may bounce around here for a while but if we are correct, stocks should not go much lower. Market has moved into the top end of our buy zone but early, although just how early is debatable. Since oil and gasoline are major contributors to inflation, a rally here would stoke inflation fears.
We still have downside targets in the 405 to 400 area on SPY. We also note that grains and oil are rallying a bit, as we thought they might. This could contribute to winter inflation and Powell’s interest rate stance.
The daily stochastics on SPY and QQQ have gone into sell recycles, and the weeklies are overbought. Since the indexes have rallied to resistance, it is logical to expect some pullback from this area. Our Put/Call chart suggests that in spite of the very negative anecdotal sentiment, people are not acting too bearish, and that bearishness is falling off.
The fact is this expiration is too difficult to call in terms of direction, so we would use weakness and moves below strike prices to add stocks, especially in Healthcare and Biotech.
The indicators suggest that the first part of a low is in, and we will watch on the inevitable pullback to see how the indicators look. This week is options expiration, so there should be some sharp up and down moves.
We attacked our target zone of 418 on SPY, and with overbought breadth oscillators and some weak internals as well as overbought daily stochastics, it is likely to pause and pull back here. It should test 408 to 405.
We have no changes to any views expressed in Monday’s Weekly Review. KWEB is stronger than GXC. So far, these look like trading ranges and not disasters.
While we may have started the intermediate bottoming process, and some intermediate breadth indicators have improved, we still are a ways away from having a solid buy signal on our internal indicators. Do not overlook Small Cap Value.
We continue to see bottoming signs on an intermediate basis even as we see some short-term problems. Our view that the FED will NOT go as big as market pundits are suggesting (which we have been forecasting for over a month) is what the market is saying to us now.
Friday should be up and close between 398 and 400 on SPY. We will liquidate all trading longs on Friday or at these numbers. if hit. A move through 117 on TLT would target 120 to 124.
We admit to surprise that indicators failed to improve last week. We will watch the internal indicators this week, especially if the rest of the week is up, and will let you know if there are any significant changes.
Market internals did NOT improve as much as we thought they should, which suggests that this is not a final bottom. It is worth noting that some very long-term measures of breadth have become very oversold. This confirms our view that a dollar cost averaging methodology is correct. Biotech could be strong speculative ideas for the second half of 2022.
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.
