The environment in the markets remain challenging for investors. With Q2 earnings season ahead and global slowdown looming large, I expect the choppiness to continue.
In last week’s tactical view, I warned not to chase the rally, after the S&P 500 gapped up large on news about a European Bond program. I could see a bit further upside then (see charts) but the market was vulnerable to decline. I issued a quick warning on Thursday (during Aftermarket hours) of the impending reversal.
On the back of the light holiday volume, the markets where whipsawed back and fourth, making a constant investment style difficult. The market chose to close with a gap above and below our current position, opening the door for maximum damage should we chose to gap up or down on Monday (see charts below). We have never backtested the June lows, and yet bullishness has returned with a vengeance. Everyone who missed the boat last year is eager not to repeat their mistake.
The daily chart on the SPY still looks a little bullish, although we can see sings of exhaustion:
- Most Oscillators are solid in overbought territory, despite the drop on Friday.
- McClellan Oscillator swung to a new multi year high last week. By itself it doesn’t mean we have a top, but significant tactical tops usually coincide with extreme readings on this oscillator. We could still burn off the reading with a prolonged sideways move.
- Bullish (and bearish) volume has been declining since the early July bottom. The bull seems to have tired itself out.
- We failed to hold the previous top at 1363 and just fell (gap) through it on Friday
- Weak Semiconductor sector (below)
- EUR/USD made new lows last week, which is a bearish sign for equities
- We are still in an uptrend
- We got yet another trend reversal candle on Friday, closing of the lows and penetrating the upper gap in after hours.
The chart above shows the potential gap scenarios. It appears that Alcoa’s earnings report has the potential for this (industrials are weak due to China slowdown) on Tuesday.
So far wave volume (total volume per up or down wave) is still on the side of the bulls, as each bearish wave had less volume than each bullish wave (see above). However, total volume is declining, making a bearish flip easier. The A/D line also doesn’t look too good.
If we plot the relative performance of the market and compare it to treasuries, we can see that we haven’t progressed much in this “recovery” and that we are much further below the March/April/May top than equity prices would suggest. It thus appears to me that the rally is once more fueled only by liquidity and possibly by capital flight from weaker geographic regions, which is not a healthy market.
The Silver / Gold ratio, a common indicator for the risk-on trade is still in decline. It never joined the rally.
I am still tracking the relative performance of the technology sector. It is moving toward its cyclical low (blue line) and has already begun to show deceleration.
The Semiconductor sector, a leading cyclical sector, shows relative weakness to the S&P 500 which seems to indicate further weakness in equities ahead.
The real estate sector shows good relative performance, which is a positive sign.