The accumulation models suggests that some of the fits and starts in leadership changes we have seen in 2021 will resolve in favor of new sectors, long-term bullish for the market and in line with what we have suggested.
Stocks fell a bit more than we expected on Monday, but the pattern we have been looking for is continuing. We still expect some lower prices – but realize that in a correction of this type, not all stocks decline or bottom at the same time.
IYT and the Dow transports are holding the double bottom made over the last week, and that is an area we will be watching this week, as Transportation indexes remain one of our favorite economic indicators.
The situation here remains fluid and we are coming into options expiration this week, but we still believe this is an excellent chance for a drop that will lead to a fall buying opportunity. SPY is at a key area as well – 445 is some support as well as a strike price. That is one reason why we think a bounce is likely, but this could break this by Friday. A move below 438 would project further downside.
Stocks closed out August quietly. Monthly and Quarterly indicators (our longest-term indicators) are all suggesting the risk of a pullback in September/October.
Breadth indicators are close to overbought again, and we still see the possibility of a fall correction in this timeframe. Biotech has built a base, and on an intermediate basis it has also built a high-level consolidation. Realize this could be a strong sector this fall even if the market corrects.
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.
