Key Technical reasons for thinking a larger low is near
- SPX rally has carried prices up to short-term resistance levels just above 3900
- Key reasons revealed why stocks are nearing a more serious low
- Re-Opening trade outperformed sharply on Friday
Friday marked the broadest rally we’ve seen all week, with excellent participation and also more than 90% of the volume into advancing stocks vs. declining. This week’s move was encouraging in how it has helped short-term momentum improve a bit. However, while a number of reasons stand out as to why stocks are very close to a more intermediate-term low for 2022 (which is explained on the next page), more progress is needed from price to argue any real technical improvement. As discussed yesterday, nearly the entire week has seen defensive positioning, downtrends and intermediate-term momentum remain structural concerns. As of Friday’s close, prices are now up to a zone of important short-term resistance to this bounce, and I suspect that SPX-3920-3975 could be important for Monday and also QQQ-298-304 as an area for QQQ where prices might stall out. Given the upcoming Russell Rebalancing and end of quarter flows, seeing some backing and filling to this week’s sharp rally might be necessary before a more material low is at hand. The important catalysts should be the start of the US Dollar and also TNX pushing back to recent highs, which might have gotten underway Friday.
Key Reasons that a Technical low is near
- Cycle projections explained back in January pointed to June/July as being important for a low in Stocks, bottoming initially into late June
- Technology has begun to trade “less bad” and “FAANG” issues have been outperforming over the last few weeks along with Growth outperformance
- Positive momentum divergence is apparent on daily and weekly SPX charts, as RSI failed to move under May lows to follow price and is turning higher
- Elliott-wave projections suggest one final pullback under 3639 should be something to buy into, which might mark the end of the entire 2022 decline
- US Treasury yields and US Dollar both look close to making meaningful intermediate-term peaks which could arrive in late June-mid July
- Sentiment polls and positioning show bearishness to be at one of the highest levels in nearly a decade (AAII bears are nearly 60%, while fund managers have high cash levels and low Equity concentration)
- Nearly 95% of all SPX issues are now under their respective 50-day m.a. while 70% of stocks are down more than 20%+ from 52-week highs. What’s left to decline?
- Improvement in Healthcare along with FAANG stocks stabilizing provides some meaningful tailwinds for Stocks given their representation
- Mid-term Election year tendencies show June to be poor; However, July is the 2nd best month of the year, up on average more than 1.3% during mid-terms
Overall, while the near-term bounce does look to be nearing initial areas that look important for selling into gains from a trading perspective, the intermediate-term picture would suggest Equity markets have begun a bottoming process.
While that often plays out as a number of initial failed rallies that pulls back to retest lows, it’s right to consider buying dips in areas such as Healthcare and parts of Technology that have started to stabilize.
Commodities should be avoided for the next few weeks as this pullback runs its course, and it’s expected that the US Dollar and also Treasury yields are likely to rally into quarter-end given their recent stabilization within uptrends. This should be the catalyst for why Equities might weaken over the next week.
Reopening Trade outperformance- This looks to be short-lived only
Friday’s sharp gains came mainly from the Consumer Discretionary sector as many retail stocks bounced back.
Yet, the strongest gains came from the Cruiseliners, Airlines, Casinos and many of the groups which have been come to be known as the “reopening trade”
Unfortunately, the 10-15% gains seen in many of these stocks are largely within ongoing downtrends. Charts of the US Global Jets ETF, JETS0.24% , has rallied back to test a very serious area of former trendline support that had been broken over the last two weeks.
It’s thought that the Airlines, Casinos, and Cruiseliners should all be a group to consider selling into as the quarter reaches a close. Bounces in this group, for the most part, are concentrated in the weakest parts of the market. Most initial gains in very weak stocks normally fail as they approach serious resistance, as seen below. Until more structural evidence of strength is apparent, it’s going to be right to sell into strength and continue to avoid this area.
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