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.
Some indicators are becoming overbought, however, especially daily stochastics, and the McClellan Oscillator. This suggests a short-term peak by the end of the week, per our forecast, is certainly possible. So far FVX has made a lower high but above 31 would suggest much higher rates short-term, and this would concern the equity markets.
Internal indicators continued to improve last week, in spite of a down close to the week. Honestly, we are surprised that we have not seen any sort of panic given the pervasive negative commentary in the news and with investors we speak with.
There was enough momentum on the downside so that this should have a retest – and this sort of formation should have the retest by the end of June. One concern about this rally is that call premiums are really high, suggesting a near term pullback, and SPY could easily pull back to 404 to 405, before having another surge. Biotechs are the most interesting speculation in this area and may indeed be the most interesting speculation for the remainder of 2022 and into 2023.
The most important thing we are seeing that bodes well for an equity rally that could last even longer than this week, is the action in MUB. One way to take advantage of both a short-term May/June rally, as well as a June Low, is PDP.
There has been enough improvement in the internal indicators to suggest an imminent rally. Momentum indicators then suggest another decline is likely after this rally (assuming it occurs). The bond market is very interesting here, as it is suggesting a short-term peak in inflation has likely occurred. Several friends in the oil business in Texas have indicated to me that there is little to no incentive to drill, even though some of the onerous environmental regulations have been relaxed.
This is the sort of trading we want to see to suggest a rally can last for more than just one day. This rally could make it to 420 on SPY or so and then fail. Failure at 410 would be a concern, as would a new low before hitting 410. MUB made a new low today, and TLT was down as well. This suggests interest rate pressure is not going to abate, as we thought it might this week.
The trading is a bit better, and we think a trading rally should start from here. This could reach as high as 430 on SPY. If/when the market becomes overbought it should decline once again, and this could lead to the decline we are looking for, into June.
With Investor’s Intelligence at 39% Bears, and the put call remaining elevated, we are finally seeing some decent fear. We continue to suggest dollar cost averaging into models at this time.
Stocks are trading in a way that we call going “aggressively nowhere.” Dividend stocks remain strong. Advisors should be starting dollar cost averaging attractive issues with strong relative performance.
Equity market indicators continue to suggest we look for a low in the June timeframe. Much of the time the market bottoms during a recession, and not at the end. We would consider adding to the small cap parts of models in this area.
Unless reversed again on Wednesday, this should put to bed the idea of a short-term Head and Shoulders bottom on SPY. Small cap is acting better and small cap Value better still. TLT back below 120 would be a concern.
Holding the SPY 420-area would suggest some more consolidation with resistance around 450. Since we are looking at the possibility of a low in June it is likely that the market will attempt a rally here and get short-term overbought before the final low. All of these soft commodities suggest that we should see a bit more inflation into the third quarter, at least.
Stocks have rallied this week as we indicated they might, and could move a little higher, but should run into some trouble at 447 to 450 on SPY, and 351 to 353 on QQQ. Again, we note that these sort of dramatic up days are often signs of a bear market rally.
While this is still intermediate-term negative, there are a couple of favorable patterns that could spark a short-term rally. We would not be surprised to see an up week. The question we have to ask is why, if optimism is as low as the AAII survey suggests, has there been no panic put buying? We think the reason is that people continue to feel that when the war is over ll will be well, in contrast to our view is that the problems we are having are not caused by the war. If Municipal Bond ETFs go much lower, the downside target will be the actual 2020 lows.
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.
