So far, this week is shaping up as we thought, with a slow start to a market rally led by small and mid-cap stocks. It should pick up into this Friday.
We expect another week like last week, with a slow start to the week and a strong finish. We also expect strong performance from smaller stocks and equally weighted indexes. The technical patterns of the Latin American ETFs suggest a broader rally over the next few weeks, which would coincide with a summer rally.
Stocks are entering a period of favorable seasonality, and indicators suggest a rally is likely here. Bonds are at a key juncture. It looks as if rates are going to fall a bit here and prices rise.
IWM needs to exceed 221 and then ETF can challenge its all-time high. SPY is set to rally as long as above 416 it should advance from this area. QQQ needs to hold 327.
The stock indexes look set to try for a summer rally in line with our “Buy in May” research piece. Overall, the message of the agricultural commodities charts is a short-term peak could be close by.
Stocks are acting about as expected, and expiration shenanigans seem to be “ruling the roost” this week. TLT has pulled back into support and is a buy recycle on the daily as well as the weekly charts.
We note that Tech had a bad day on Tuesday – this could be the start of a new downtrend in tech relative to SPY, IWM, etc. as we mentioned. TLT tried to rally but has not yet gotten above 140. When it does, we look for a rebound toward 150.
It looks as if the transition from Growth to Value is still alive. Right now, Latin America is suggesting that the emerging market trade has got the potential to weaken a bit, so we would be a bit cautious there.
If TLT can show some zap on the downside, then it might affect stocks. If you are in GLD and are nervous, this is a selling opportunity for at least some of your position. If you are interested in TAN this looks like a good buy point.
Key points on the various indexes this week, in the event of declines on earnings, are as follows: SPY 412 to 411, and then 403. QQQ look for 326, then 314. IWM 215, then 200. IYT could test 252, then 247. GLD still could be up for a bit, and we would hold it based on the weekly stochastic, which is in buy mode and halfway up the range.
We are finally seeing some corrective behavior. Some preliminary downside targets are 400 or so on SPY, and 324 on QQQ. We would love to see IJR at 102-105 or so.
In spite of last week’s action in the QQQ, it remains the least favorable accumulation model, so we are sticking with the idea that this rally we are seeing will fail, and the downtrend in QQQ will resume. Our view here is that Japan is consolidating recent gains and will continue to advance in the second half of the year.
We are going to discuss “volatility” in this report, as we have had some questions about the VIX and related indexes. For the FRED Report, we define volatility as the distance between the high and the low of a bar. When the range expands, volatility is rising, and when it falls volatility is declining.
We are a bit surprised to see that the “junky” stocks aren’t rallying more – quality like AAPL, AMZN and the like are up but not the speculative names. That should change this week.
TLT has started to rally as long as it can move and stay above 138. GLD has also rallied a bit and should test 165 at least, above that and we should see more upside.
This week is shaping up to be interesting, with countertrend rallies developing in stocks, bonds, and gold. We believe that market leadership is shifting away from the Tech sector longer-term.
So far, this correction has been rotation and not straight pullback, and that should change later in 2021. XLI and XLB are trading up to new highs and should continue to do well in the second quarter. Unless TAN moves above 100 very soon it is an established downtrend with an objective of 75.
Indicators are mixed in spite of a record close on SPY Friday. The New Highs/New Lows indicator, in particular, had negative readings. We have recommended that advisors buy a combination of GXC and PGJ, with the amount of PGJ governed by the risk tolerance of the client. We see no reason to change that strategy.
