Breadth acceleration should mean all dips buyable next week
- SPX rally likely gets above 4000 into Thursday/Friday before minor stall out.
- Homebuilder rally has broken long-term downtrend, despite poor Home Sales data.
- Europe likely to face strong resistance near its 2022 downtrend in the short run.
Wednesday’s follow-through looked constructive after Tuesday’s broad rally, and near-term price action still should lead higher into mid-Thursday before meeting much resistance. SPX is knocking on the door of 4000, and while many indices look to be nearing initial resistance, I remain convinced that this week should not be just a bear market bounce. This rather should signify the start of some upward progress for markets into September. Any backing and filling into next week should represent an opportunity to buy dips, and it’s thought that recent breadth acceleration and structural improvement are welcome technical developments for the Bulls. SPX should encounter resistance in a zone that starts just over 4000, while pullbacks should have strong support at 3721.
Breadth acceleration this week helps to add conviction
While upside volume certainly provided some bullish clues this week about this rally having the potential to extend, it’s also been helpful to see the percentage of SPX names >50-day m.a. break out above multi-month resistance.
I feel technically that the last few days have represented some of the most broad-based rallies that we’ve seen in recent months and have helped to add some conviction at a time when many remain skeptical. Although NYSE Advance/Decline line has not yet broken its downtrend, the upswing in cycles into August likely should help to exceed this downtrend, which I’ll discuss when it occurs.
While near-term resistance to this bounce could be in place by Thursday or more likely into end of week (allowing for some backing and filling), pullbacks into next week should be buyable after FOMC and mark a chance to buy dips for those that missed this most recent advance. Both SOX index and IWM 0.47% are now nearing trendline resistance, which had been broken by SPX and DJIA 0.05% . Thus, a bullish bias remains correct, looking to add exposure into next week.
Homebuilder breakout looks constructive technically despite another month of lower Home Sales
Wednesday’s fifth straight month of decline might make some start to get nervous about Builder stocks. However, it’s notable that the SPDR S&P Homebuilder ETF has just broken out this week above a downtrend that’s been in place this entire year.
As we know, fundamentals rarely coincide exactly with how stocks move on a day to day basis, and given that Builders declined sharply (even while sales were rising earlier this year), now they’ve managed to bounce sharply despite five straight months of declines in Existing home sales. This is their longest streak since 2013.
Importantly, much of this year’s decline was a replica of the broader stock market’s woes but did occur largely as Treasury yields were rising. Now that rates have backed down a bit, a stronger than anticipated rally has begun.
Overall, given my expectations that Yields likely should face a maximum rally to 3.50% but have a potentially larger decline in the back half of 2022, I feel this group is looking increasingly more attractive. The XHB ETF should rally in the months ahead to 64.60 and then 69 without too much trouble. Stocks like LEN 0.51% , TOL, PHM 0.36% , BLDR 0.86% are among the most attractive of this sub-industry and, we believe, can be overweighted.
Europe’s STOXX 600 nearing resistance ahead of ECB meeting
Interestingly enough, just ahead of Thursday’s ECB meeting, we’ve seen the same sharp rally in European names as has occurred in the US. STOXX 600 index, shown below, has now approached this year’s downtrend line, and technically this might pose an initial area of resistance to this rally.
Thus, one could make the case for a stall out in SXXP into Thursday and also a likely rollover in EURUSD (Not shown). Overall, the June lows held right near March lows, and this looks to be an important area of support, which likely should hold into late July.
Bottom line, one can expect some resistance in SXXP, and ETF’s like VGK, EZU -0.35% , or FEZ -0.32% which give exposure to European Equities likely will be more attractive to consider following consolidation into next week.
