Markets remain volatile, but are now in position to attempt a rally as you can see from the proprietary charts on breadth and sentiment. For clients we would still put money in models, but slowly, realizing this correction probably has more to run.
We thought we should have a yearend rally led by Small and Mid-Cap stocks, but it was led instead by large cap – this is setting up for problems over the next few months.
SPY has pulled back to support in the 450-area and held so far: Accumulation models on SPY have started to weaken, but not enough to derail a yearend rally. The Monthly and Quarterly indicators are overbought, but this is a problem for next year.
The market was set up for a fall decline, and this happened. Now, it looks as if the yearend rally has started. Small Cap traded better on the pullback, which we expected. Transports remain a concern, saying the economy could weaken. At this writing, it looks like we should have a yearend rally led by Small and Mid Cap stocks. RSP should also outperform. This rally has started.
We are expecting a setup for a yearend rally from this correction, but that is not here yet. Give this corrective behavior a bit more time. The weekly stochastic could recycle. We will look for a buy signal around October expiration – the market could be choppy until then.
Growth is acting a bit better than Value once again, but this should change on a pullback. It looks as if a pullback should occur, but we have to monitor this – lots of folks are looking for this. Transports remain a concern, saying the economy could weaken.
The market is set up for a fall decline, although there are some signs of strength. The Delta Variant may not be reflected in current prices and we see continued transition from tech leadership into small and mid cap stocks.
TLT is rallying per our forecast. It is trading around 145 resistance and moved above as accumulation models have improved. This has hit our short-term target of 148. This rally could give way to another decline this fall.
Our favorite broad-based Commodity Index ETF, DBC, is moving above resistance and should do well this summer. Watch oil via USO, DBO and DBC carefully. The oil stocks may have made a seasonal low and through resistance at 55 on XLE would be strong.
We expect a dollar rally, as accumulation models on DXY are strong, and the pullback/consolidation in April was expected. Commitment of traders is also strong.
The Put/Call ratio has moved back down into negative territory: Sentiment indicators are “condition” indicators for us, and not timing tools. Put/Call is more of a short-term indicator. This indicator suggested a rally should occur and it has. Now, this indicator has moved back down into negative territory.
The latest sell-off has been blamed on short squeezes, Robinhood, hedge funds or the full moon. In fact, this was a set up towards yearend 2020, and stocks should continue to be choppy into the end of the first quarter. Favorable vaccine news may be baked in, and we see continued transition from tech leadership into small and mid cap stocks.
As mentioned, the first year of a new president is difficult, so we are going to look for a less strong year than the consensus: our projected range is SPY 403 to 409 on the upside, and we expect a choppy year.
We are overweight XLI and XLB. These still have strong accumulation models. We are underweight XLRE and XLF. We lowered XLF to an underweight, and the accumulation model here has weakened over the last five months. We have a fundamental concern about nonperforming loans, as these must be reported once again, after a moratorium.
TLT has weakened short-term. Below 160 is a concern that sets up a move to lower prices. LQD still is the strongest bond ETF. Accumulation models are in the same pattern. These low rates may not last through yearend. HYG and various junk bond ETFs have pulled back but now have given daily buy signals. These are in a trading range. We continue to be cautious on bonds, and use alternatives such as PCEF, VRP, CWB, and dividend stock ETFs for income.
The Put/Call indicator moved down to negative territory two months ago and has remained there. While it gave a buy signal at the march market low, it is making multi-year lows. This is generally shorter-term in nature, and suggests a sharp, but not lasting, drop.
