Stocks have continued the pullback we have been looking for, closing below the 512-area on SPY that has supported this market. This targets the 500-area we discussed as our secondary support. This pullback is probably not over, and after this week the decline might resume.
Everybody should reread the Weekly regarding a potential upsurge in inflation and watch oil with regard to this. One of the sectors that is trading well, and related to commodities, is XLB.
The only concern we have is that the daily stochastics are only about halfway down the range, even on the weakest indexes. This suggests there could be some sideways action or even further decline to secondary support. Interest rates do look ready to advance.
A break of 512 on SPY would target 500. QQQ has tested the 439 support we have been looking for and much below Tuesday’s low at 438.03 would target 432, then 400. A TLT close below 91.42, would suggest a sharp rise in rates is likely ahead.
We continue to see that the stock market is broadening out, as RSP has made new highs, along with MidCap. If TLT becomes overbought, without price exceeding the last high, and ideally testing the 100-area, the chance of a rate cut drop, in our view.
We would be careful of the next sell recycle in QQQ and IJR – these could affect the whole market. We are holding positions, but mindful of benchmarks. We have mentioned using Canada as part of an international allocation, and that still seems to be a good idea. EWA is weak, reflecting the weaker Chinese market, and we would not use it.
Daily stochastics are still in sell mode and this remains a concern for us. If we were to add to positions, it would be in these two indexes (QQQ and IJR).
The advance is not over even if there is more correction, as we expect. The McClellan is a shorter-term indicator, and it suggests some more downside here.
Readers know that we have been emphasizing Healthcare and Industrials as favorite sectors and both are breakouts. There are several sectors that are improving – look at XLF. We want to start adding to Mid-Caps and have some ideas that look strong. We will look at XMMO and XMHQ.
We would like to see this continue to at least 480 to 500 on SPY, and to 430 to 425 on QQQ. TLT is rallying as stocks pull back. Resistance here is from 97 to 100. It is very possible that when TLT hits 97, the correction in stocks will be over.
Stocks continue to trade up, a bit more than we have expected, but accumulation models are still in strong formations. We have been early on Biotech, but it looks as if our patience will be rewarded. Unless FXY can start closing above 67 soon this is set up to continue the downtrend. Our current opinion is the dollar is a range, but with an upward bias.
We ran Accumulation models on the stock indexes and SPY and QQQ models are still close to new highs. This means that there is no danger of a major correction in stock prices. As we have mentioned on various calls, the risk here is that rates go higher. This would imply a break of 90 on TLT.
Small Cap looks stronger than we expected, in terms of Accumulation. There could be some interesting action here over the next few months. The chart patterns of QABA and PSCF suggests that NYCB is probably an isolated incident and not a symptom of a larger problem.
We remain intermediate-term bullish and expect strength after a market pullback. XLV is a high-level consolidation that has lasted for two years. This has big potential as we have said.
Stocks as measured by the S&P 500 are trading up into the end of January, and while there is some broadening of the market, it has been less than we would have liked. Is this the ultimate bottom for China? We are not sure, and we do not like the Chinese fundamentals, but these ETFs have become a fairly low risk opportunity.
TYX has resumed the yield rally attempt, but the 44 area is resistance and it has failed in that area once in the last week. It looks like this resistance should hold this.
