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.
Oil had a big drop Tuesday. Does that mean that the current advance in oil is over? We don’t think so, and the reason why has to do with cycles, which we will explain.
SPY may have had a false breakout above 393, a concern but the formation needs to be completed to be valid. A close below 386 would tend to confirm this. QQQ is in an interesting and vulnerable position, and while a move above 328 would repair the chart that is unlikely without another test of 300.
This week is options expiration for March, and we expect a volatile, up and down week as the Federal Reserve (Fed) is out with comments. We have had a downside target of 160 or so on GLD that we thought it would be hit in the second half of 2021. Accumulation models remain weak, but do have some bottoming signs, the first in several months.
Friday’s reversal notwithstanding, we are seeing some signs of technical weakness that are resolving some of the overbought condition intermediate-term. Friday’s action was encouraging and positive, but big up days/reversals in these sideways trends are often a sign that the decline is not over and can be retraced. A move on TLT back above 140 would be strong at this juncture.
TLT is interesting as it is now holding the 140-area. It has been a bit weaker than we thought it would be, but now looks ready to start an advance to 147, as long as it can remain above 139.
The same themes we have noted over the last few months have been apparent in the accumulation models – small cap continues to look stronger and tech a bit weaker. PSCE may pull back into the end of the quarter, if our market forecast is correct, but has real room to run for speculative players.
The decline has been selective, with QQQ and the Tech’s correcting more than other groups, while XLF, XLE, and XLI are rallying while this goes on. SPY can still approach the 373 area by the end of March, but this move is so choppy, it is difficult to short and should continue this way.
The market is acting tired, and we still believe that a pullback into the end of the first quarter is possible, and this should retest the 370 area on SPY or below by the end of March. We ran our Accumulation Models, and these continue to show IWM, IJR, and even MDY as the best areas to look for performance.
One of the most interesting things we have noticed the last couple of weeks as we have been working with data from Barron’s is that there has been a surge in up volume in the NASDAQ. The Agricultural Commodities have continued to advance but now have some signs that a consolidation is likely.
India has been acting very well here and is one of our favorite International Markets. The Nikkei 225 is continuing the advance from last year and remains a very strong rounding bottom chart.
This week is likely to be similar to last week: choppy and may generate a sell signal for expiration week. Gold had a bad week last week, and the trading has pretty much negated the daily and weekly stochastic buy signals we had coming into the week.
