Tuesday’s market was down a bit more than we thought it could be, but this still looks related to expiration, with the real decline starting next week. The main point here is that we are more vulnerable to a correction than at any time since the bottom in March. We will be watching the small cap indexes to see if they continue to show relative strength as the market falls off.
Indicators suggest a good bit of selling occurred last week – New Lows increased, and the accumulation models on SPY and QQQ showed selling as well. We are seeing more days (such as Friday!) where the equal weighted indexes outperform. Our accumulation models suggest REITs are strong, and the models are stronger than the price charts of all three of these (XLRE, IYR, VNQ).
QQQ and SPY are on daily stochastic sell indications, as are IJR and other indexes, so this should be a consolidation or the start of a decline. We would consider buying this pullback if we test 260 on SPY by next week.
Daily indicators such as the Stochastic are overbought and suggest some pullback is likely over the next couple of weeks. We still see a quick decline to 260 – 255 on SPY as possible, as long as prices stay below 285 or so, on a closing basis. Some of the constituents of DBA are starting to show some bottoming signs, mostly SOYB, WEAT, and COW.
We continue to see outperformance in small cap ETFs and indexes. If this continues in a pullback, the chance of a severe recession and therefore a break of the March lows, is diminished.
Stocks are acting as we expected, and we should have a down week but our worst case for the week is 260 or so on SPY. The key for most advisors here is to trade a bit and not just sit, which is hard for some of you, I know.
Stocks tend to rally BEFORE the end of a recession, and small cap issues tend to lead large cap coming out of a recession. Friday was the first day we have seen this type of action in small cap relative to large for several months – i.e. before the correction started. Speaking of this week, we would expect the market to pull back a bit and have a down week. Indeed, last week should have, and probably would have been down had the GILD news not hit.
This market is a hold, and not a big short for us. Indicators suggest a test of 260 on SPY is possible by the end of the week, but that we should have a down week in any event. TLT also looks to pullback a bit. The trading in this has slowed up, and the ranges have narrowed as well.
Ideal would be normal trading, backing and filling and a price decline that holds 255 on SPY for this week. We do expect the SPY 240 area to be retested also, but probably not this week unless 255 is breached.
This should be the best week to raise cash, write calls, or otherwise be defensive. After this week (if not sooner) we could start another move down. TLT has been pulling back over the last few days and has held on for now. A move below 163 now would target 156. LQD has rallied to resistance and could fail in this 124-area. A retracement into support of the move off the low is quite possible.
The Fred's Price Oscillator (FPO) is giving some indications suggesting very strongly that the 220-area low is the low that will hold for a bit. We are seeing some good signs in the New Highs/New Lows indicators. New Lows have fallen off – from 2714 new lows on March 20th week to 284 this week.
We still would not be at all surprised to see a move down to 235 to 230 on SPY, as we have discussed elsewhere, and expect a down week. We would add money on a dip toward SPY 235. GLD has started to retrace as well, and could retest 142, where we would buy it again, for a move to 153.
We have heard a lot about big equity buying as rebalancing occurs on Tuesday, but the indicators suggest this week will be down, and could challenge 235 to 230 on SPY. EWJ at short term support is probably a good addition for international exposure at this time.
If this works like it did in 2008, the big push we see now (which happened then – up 12% in a week as mentioned in the weekly) should give way to a choppy, difficult rally with scary down moves as part of an advance.
The A/D line did not make new lows and is showing some divergence. The last several days of this decline has been exacerbated by margin selling, and this should begin to abate this week. We have a short-term buy signal on GLD that might make it tradable here.
All financial assets tend to become correlated towards the end of sharp equity bear market moves and is actually a good indication that such a move is ending soon, at least for a while. Our Accumulation Models have become negative on GLD, similar to TLT.
These big ups and downs are bear market action. Until this type of action stops, we would continue to spend cash sparingly. The one concern we have in commodities is that accumulation models in USO and UGA suggest that these low prices will last for a bit, which in turn suggests oil stocks are not candidates for recovery.
What do we want to see in the equity markets, to be more confident we are in a bottoming area? It looks like today will be the sort of day we would like to see, with a down open, and trading in a more sedate matter. Consolidation in this area and some up and down moves would be ideal.
The first bounce was roughly a 50% retracement, and the short-term retest has held, making a higher low, and suggesting this coming week could see a fairly nice rally despite the limit down this morning on equity indexes of -5%.
