Weekly Preview / June 27
Notable Events on our Weekly Watchlist:
Monday: Durable Goods
Tuesday: Retail Inventories
Wednesday: EU Consumer Inflation Expectations, Powell’s Speech
Thursday: Personal Spending, Personal Income,
Friday: Caixin Manufacturing PMI, EU Inflation Rate (Flash), ISM Manufacturing PMI
ETFs to watch: SPY, TLT, XLE, DBC
The holiday shortened trading week brought advances for risk assets in all major averages. SPY finished up 6.63%, QQQ advanced 7.28% and the Russel gained 6%. Treasuries made mild gains of 0.23%, but mostly held their ground in what can be described as see-saw trading, while Commodities lost -3.38% and Gold -0.51% as the perception of safety was not in demand.
Our own Trade Alert, issued to subscribers on Wednesday was spot-on this time around, with the addition of equity risk and removal of commodity exposure perfect in terms of timing. While we can’t be consistent with these types of calls, it’s awesome when they work out. The question on everyone’s mind now becomes “Is the rally over?” / “How much more to go?”. Let’s explore and try to find out.
Market Breadth Analysis
We are focusing on the Market Internals > Overbought/Oversold instrument as it has been the best at calling out significant pivot points in the market. As you can see, the overall situation has improved dramatically this past week. Out of 1000 different stocks, 85 are now overbought and 154 oversold (vs 800 the past week). In other words, the rally has simply normalized short term price action. But on a medium-term horizon, this indicator is trending down, as evidenced by the yellow channel that we are using to guide our trading. 90% of the advance we were expecting when we issued our Trade Alert has been accomplished. We are now entering the final stretch, which I suspect will overshoot to the upside a bit. But we will likely take profits soon, as other macro forces at work do not yet support higher equity prices or valuations.
SPY Analysis
Our previous SPY analysis clearly set out a target for the rally.
The furious 6.63% advance has completed more than 50% of the expected move. The easy money has been made.
We have updated the chart for SPY and added 50 and 20-day moving averages as areas of possible resistance. A MACD buy signal is very close to triggering today, and that will offer some short-term support to battle the moving average headwinds. I suspect the 20-day will not pose any meaningful test, but the 50-day area resistance will be much more problematic. 405-409 remains the target price for this rally. Failure at that level might make for an excellent opportunity to add short positions or hedges. There are still “trapped longs” in the market looking to get out, and they will most likely use levels above 400 to exit.
XLE Analysis
As other sectors of the market advanced, XLE gave back -4.40% - that puts the weekly relative to SPY performance at -11%, as the inverse correlation between Energy and everything else is becoming entrenched. Fundamentally, this makes sense, as inflation tends to benefit energy companies and erode the profitability of everyone else - that’s what’s driving the trade so far. In order to better assess where the rally in SPY might pause, we must also understand where the drop in XLE might stop. Fortunately, from a technical standpoint, the analysis is quite easy, with both our ML-generated support level and 200-day moving average coinciding at a value of 67-68, which resides some 5% lower. As the other types of analysis have shown, we are almost there.
Takeaway:
Short-term I would conclude this rally is almost done. A couple of percentage points higher in the main index will mark the return of complacency and most likely set us up for another nasty drop when Q2 earnings start to roll out. The alternative view is that we have seen “the bottom”, with record low consumer sentiment, low equity market allocations from active managers and rate-cut expectations starting as early as February 2023. I don’t personally subscribe to this view, but if the market can convincingly break above 410 (and especially if we see “ok” earnings), we will have to adjust and re-allocate to risk.
On a longer term horizon, we are still waiting for a drop in EPS and a reversion of valuations (where we are more concerned about the E than the P in P/E). Downward revisions will mark a repricing of equities, with current levels not reflective of recession risks. That is why, for now, we are simply trading technical moves and not “backing up the truck’ to buy stocks.
Andrei Sota