Weekly Preview / June 21
Notable Events on our Weekly Watchlist:
Monday: NA
Tuesday: Existing Home Sales
Wednesday: Powell’s Testimony; Consumer Confidence (Flash)
Thursday: Initial Jobless Claims, Powell’s Testimony
Friday: New Home Sales; Michigan Inflation Expectations
ETFs to watch: SPY, TLT, XLE
Coming on the heels of a dreadful trading week, where major averages finished down between -4.8% (DOW, Nasdaq) and -5.8% (SPY), both sentiment and positioning echo extreme oversold levels on virtually every measure. You can clearly understand the record bearishness level by taking a look at the market breadth analysis below, but there really is no shortage of indicators, charts and analysis that are simply at extreme low levels. Moreover, during the weekend, crypto markets came under tremendous pressure, with Bitcoin breaking the psychological 20k level to trade down to 17.744 on Saturday. It has since recovered, but some view it as an ominous signal nonetheless. This week we will get Home Sales data, preliminary info on the labour market, inflation expectations and Powell’s testimony. Given the reaction to the Fed Chair’s comments last week, we are left to wonder if he will soothe the equity markets in any way by at least mentioning the Fed’s third directive - “market stability”.
Market Breadth Analysis
SPY Analysis
Technically, SPY is no longer oversold, according to our oscillator. An exit from oversold conditions, coupled with extreme bearish positioning, could signal a sizeable bounce, akin to a “bear-market rally”.
SPY closed just above our technical support level of 365.03. We can use this level as a stop-loss for a speculative net-long position on the thesis that the extreme oversold conditions will revert at least in the short term. Target for the rally is the previous support level of 408.93, now turned resistance (or 45-50 area in the Market Breadth oscillator, whichever comes first). I would prefer using options for this trade rather than an outright long position due to better drawdown protection in the case that the movement fades).
Sectors
All sectors of the market are deeply oversold, as measured by extensions below their 200, 50, 20 day moving averages. The only sector trading above its 200-day MA is Energy (XLE). We will get to that in a bit, but for now, note the respective Absolute and Relative Z-Scores for the sectors. I have highlighted the relative out-performers with the green rectangle and the under-performers with the red. We generally suggest using weakness to add to outperforming sectors if you're so inclined, and selling the under-performers on strength. We currently don't see a full market rotation in the works.
XLE Analysis
Market Fundamentals
Takeaway:
Short to intermediate term we see extreme oversold conditions fueling a rally or consolidation at current levels. Slight rotation might occur from XLE to everything else. Short positions have little upside left at this point.
On a longer term horizon, valuations are starting to look appealing. A series of quality long positions can be initiated here. Short term gains should be hedged however, as this market still looks frothy to us, with many speculators still trying to buy a bottom. Instead patience is required and our strategy requires moving slowly.
Andrei Sota