We come into this week looking for a pullback in July. We would use strength this week to sell underperforming positions and prepare to redeploy that cash on a pullback.
We have noticed an interesting feature of most of the indexes we have looked at, which is indicator commonality. Will we get the correction we have been looking for in July? We think it is likely, and certainly the risk to the market is there.
We would look to add some cash here at 300, then at 290, and then at 270 to 260 especially if we are in that area in mid to late July. We now think that a pullback in July is the last significant risk before the election.
We would continue to look for continued choppiness, and a likely decline into a low sometime in mid-July. We would consider buying XHB on a pullback into support.
We expect more backing and filling, and still more decline is possible. Realize, as we said in the weekly, that we are bullish through the election, and SPY should make all-time highs. However, even though the market is stronger than expected we could still see decline into early to mid-July.
Short-term indicators have hit overbought extremes, and as mentioned before, the put/call ratio and other sentiment data has hit giddy extremes. We have target points at 295 to 288 or so on SPY. Below 287 on a closing basis could target as low as 260, which is our maximum downside for a correction unless something odd happens.
We may have started a short-term pullback. We still feel that a steeper pullback, if it occurs, will be in July. Trading support is 298 on SPY; longer-term support remains 280 for now.
We have seen the outperformance of small cap over the last month or so, and as mentioned believe this means business conditions are better, and the chance of a recession is less. The market is broadening out, and likely away from Tech.
Stocks have continued to rally a bit, and as mentioned in the monthly, the daily FPO is overbought enough to spark a pullback in June. We could see a test of 312 on SPY or so before that occurs.
Put/Call numbers have fallen into sell territory. REITs have underperformed a bit, but if the economy normalizes this area should snap back, albeit with some changed fundamentals.
The timing or likelihood of a severe correction is way down over the last few weeks, until we get a signal. Yes, this is a surprise – the market is stronger than we expected on this open. A drop into July should look different than the drop into 2009 from 2008. One reason for this is that Accumulation models for many of the stock indexes are hitting all-time highs.
In various discussions with clients inclined to short we’ve mentioned that we are not big shorts here – the buy signal at the end of this pullback should be a good one. It looks as if the market is going to open up this morning. If it sells off and closes down that would be added confirmation for the correction.
Indicators weakened over last week, and support some corrective behavior later this week. We will watch the front Crude month to see if there are looming issues, and also watch the trading in USO around May 19th, as that is when the June Crude Oil options expire.
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.
