The market is set up to correct, as the internals have weakened. Emerging Markets have been weak because of China (really Hong Kong), but the accumulation model on EEM remains strong, suggesting this is temporary.
We also note that the breadth oscillators have rebounded enough to relieve the oversold and have started down. Between Friday and next week, we should make a short-term peak. Daily stochastics are turning down.
The summer rally has continued into August, and while we are expecting a peak in the equity markets this month, there are some patterns on breadth tools that suggest this peak is not yet here. If you are worried about a potentially slowing economy, consider PHB. GLD remains weak and suggests lower prices.
The investor with a long-term orientation should probably hold – the more trading oriented could consider sale. Realize oil also has a seasonal peak in this timeframe and that the commodity should decline, which could exacerbate a decline in the stocks.
Low Volatility is the most “unloved” factor out there. At the same time, we note that he charts of these ETFs are improving. The oil market is interesting here, as there are some indications on monthly indicators, suggesting a pullback is possible – most likely next month, but possibly this month.
There were some strong closes on flagship indexes, but these have actually masked some weakness that may lead to a fall correction. If there are going to be more lockdowns, the real estate sector is where the biggest risk lies.
The daily stochastics on IJR and IWM have just about hit the buy recycled, and IYT and XTN have buy recycled, setting up what should be a two-week rally. TLT had an outside day down (after a big up open), which should mean that it is starting a topping pattern right in our 150-area target for this advance.
Options expiration was down and has led to some oversold readings in indicators. Emerging Markets remains a favorite as it has the best accumulation model of the broad-based international indexes.
For now, we give the summer rally scenario the benefit of the doubt. We are watching to see if small cap stochastics become overbought without new highs. If that happens, we may have problems. TLT should hold 143, below that would suggest higher rates sooner rather than later.
Are we right to continue to recommend an overweight in the small and mid-cap area? We think so, but to feel certain we believe the market should move more towards this area in the next few weeks. Our forecast becomes a trading range in rates for the fall and not an immediate big rise. We could see an interesting situation where FXY advances, FXE remains flat to down, and the Dollar also rises.
While the NASDAQ ETFs have improved in this summer rally, our concern is that the strength in the big Tech names is masking general weakness. We would avoid EWA. We would use EWC in portfolios and note that one of our client firms has a buy indication on Canada. The charts of SLX suggest upside resolution.
Stocks are closing out the first half of 2021 in a relatively calm fashion. While a slow build to the summer rally is not unexpected, there are a couple of concerns. TLT has held the 142 area and looks to rally back toward our target of 148. GLD is weakening yet oversold, and although accumulation remains weak, we should still see some rally after month end.
There are two things we probably can say. The first is that the longer these divergences persist, the steeper the correction. The second is that while divergences are often present at market turns, they are not the cause of the turn. In other words, they are a condition indicator and not a timing tool.
We have been, and still are, looking for a summer rally to begin when the daily stochastic on IYT (iShares® Dow Jones Transportation Index) buy recycles, and that has just happened.
Keep watching IYT, as a daily recycle here should be the signal that a summer rally is getting under way. The first scenario is the most likely in our view, which is that TLT trades up to 150, and builds a topping formation that ultimately leads to lower prices, and higher yields. GLD challenging the gap at the 170-area is our minimum expectation for a countertrend rally. Be careful when the daily stochastic rolls over, as the Accumulation model did not show significant buying on this decline.
From Fred: We have no changes to anything expressed in the weekly review and wish everybody a happy expiration. Today we will do something a bit different with the Midweek Review. We have had several questions on the Meme Stock (Robin Hood) trading. While I have not studied this, Geoff Garbacz has done some work on it, so the Midweek is all his!
