We have had some questions as to whether this is a major peak and we don’t think it is – but according to our work the risk is now higher for a pullback. We have sold weak stocks, and have recommended, and still recommend, holding onto the cash for now.
We still think it is possible that 290 on SPY is tested before there are any big problems with the market. We reiterate that this sets up a dangerous situation but is not an automatic sell signal.
Interesting, and overlooked by most of the market commentators, is that Transports (represented by IYT and XTN) are doing well, but the broader XTN failed to make a new high Tuesday.
Caution flags have been out for a while, and now they are waving in the breeze. In terms of the internal indicators the biggest concern we have is that on an up week in breadth, New Highs/New Lows had a negative reading.
A close above the January highs, say at 287 on SPY, sets up corrective behavior, we actually think this will be 290 or above. Advisors should continue to trim weak sisters, but a trading peak is not assured. The setup is occurring, and vigilance is needed.
We have seen a number of articles discussing a dramatic switch from growth to value that allegedly occurred over the last couple of weeks. The metals are on support, and should have a trade to the upside.
Should the market continue through the second week of August without a new high, we would be a bit more concerned about a sell off. The most interesting thing right now is GLD as there are some bottoming signs.
We still believe that correction will occur only after a test of at least 290 on SPY, but in case this is wrong we want to start to prepare now. From a technical standpoint, now looks to be a time to start to add MLP’s to portfolios.
While the daily and weekly stochastics are elevated on the popular averages, my FPO’s area still suggesting more upside is possible. This would be in line with our forecast of a new high in July. The yield curve may be starting the process of becoming less flat.
SPY is acting as it should, and there have only been five higher closes than Tuesday’s in history. We continue to look for trades above 290, and we continue suggest caution as those occur.
We have been underweight REITs in our sector review, but the trends have improved enough to add these to portfolios, although we will remain underweight this in our large cap sector for now.
IJR and MDY made all-time highs intraday Tuesday, and as long as these lead the market higher, pullbacks should be bought. We remain with targets of 290 to 302 on SPY for this year and think that the lower end of this range can be hit during July.
For us the indicators suggest the period of maximum vulnerability comes at a new high in SPY, and certainly anything above our target of 290 that is retraced below 280 is our concern. The bounce off the GLD 117-area support looks strong and should be bought (we bought this a little too early at 119.25). Targets on the upside are 119.50 then 121.80. If these are exceeded a test of 124 to 127 is very likely.
The risk on SPY is to the 220-area, and advisors should be aware this is possible, but obviously it may not happen. Forecasting a larger than average decline in this market has been difficult, to say the least. Most who have tried this have been wrong. Part of what we try to do is identify areas and times of risk, so that we can be prepared to react accordingly. Our biggest concern is a false breakout above 287 that is then reversed. That would target the bottom of the range and quite possibly lower.
If stocks rally into the end of July or so the risk is that this will be setting up a sharp correction, so we would use a rally to take some defensive action.
Our chief concern is that the daily stochastic on SPY is poised to recycle, but after an advance, we’ll have a situation where the daily, weekly, and monthly stochastics are all elevated and moving into sell mode. The risk is that a solid decline/correction could ensue at that time.
The most important thing to realize is that the market is following the indicators, and last week these suggested a choppy week that would lead to a daily stochastic recycle. This seems to be underway, and stocks are trading well given this outlook. We expect this choppy behavior to continue for the week but note that days which open down and close above that open on the high are actually bullish days in our work.
