Stocks should be near a trading bottom following a difficult couple weeks for the US Equity market. While Technology’s outperformance has disguised some of this recent selling pressure across multiple sectors, recent weakness hasn’t proven too extreme and should be nearing a low. US Treasuries and US Dollar both should be on the verge of turning down more sharply in the days/weeks ahead which might coincide with less inflationary economic data over the next couple weeks. (May proved to be the best month for Treasuries all year.) However, until further economic weakness leads yields lower, it’s difficult to make a compelling case that a broadening out in the equity rally is imminent. Overall, bullish June seasonality combined with a cyclical bottom following lack of material technical deterioration spells opportunity for US Equities in the month of June.
Friday marked the completion of what was viewed as a very unusual month for risk assets. Early month gains gave way to back month weakness across the board that largely coincided with the bearish dip seen in the cycle composite.
Despite some minor backing and filling, the selling, however, didn’t seem too serious for a number of different reasons:
- Technology’s underperformance in recent days took away from the general broad-based nature of the rally for many US Equity sectors. Groups like Transportation, and Consumer Discretionary showed very good technical evidence of turning higher this past week.
- Treasury yields experienced their biggest decline of the year in the month of May, directly coinciding with economic data having shown some contraction and inflationary pressures having eased further. This proved to be good for risk assets as more clarity looks to be in place about the potential for a September US interest rate cut.
- Sentiment seems to have largely cooled from the optimistic levels seen in late March. Even with a rally back to new all-time highs for SPX, NASDAQ and DJIA, sentiment gauges like Fear and Greed and AAII show much lower levels of optimism and more guarded sentiment.
Overall, it seems like June should bring about a resumption of the rally following some recent jitters in the back half of May. Looking back, there were certainly some interesting takeaways from this past month and I’ve summarized some of my thoughts below.
With regards to S&P 500 price action, the last few days of selling have largely happened given the decline in many Software stocks within Technology, but some late week Technology weakness was the definite culprit for broader index gauge losses, while the rest of the market showed surprisingly good breadth.
Following two straight days of positive breadth, Equities were able to mount a strong intra-day rally to finish Friday’s session and the month of May with gains of nearly +0.80%. All 11 sectors finished positive and Energy, Discretionary, REITS, Utilities, and Staples all finished with gains above +1.50%.
While the outperformers might make Friday’s session seem a bit defensive in nature, the approximate 3/1 bullish reading in breadth showed us that it was truly a broad-based rally indeed.
The hourly chart below shows a very well established three-wave decline which looked to have ended Friday. However, one cannot immediately make the case for a move back to new highs until 5300 is exceeded for SPX, or 530 in SPY (shown below).
Overall, SPY fell to a Fibonacci-based 38.2% retracement level of the rally off the mid-April lows. Regardless of whether lows are in just yet, or a final pullback attempt happens early next week, June should prove to be a good month for stocks and the reversal in many sectors back higher over the past few days was telling.
Seasonality bodes well for rallies in early June during Election years
The pattern for June trading since 1950 has shown a distinct bias for early month strength followed by some late month weakness.
Any TNX move under 4.50% should kick off an Equity rally that likely stretches up into June expiration before some late month weakness.
This would specifically coincide with many DeMark counts on weekly charts of QQQ along with SPY and other sector index ETF’s like SMH which show a good potential for a bit more strength in June.
Crude oil might attempt an early June rally along with Natural Gas with OPEC+ meeting approaching
Sunday’s OPEC+ meeting very well could serve as a temporary turning point for Crude oil given that bearish oil speculators have built up their largest short position in Brent Crude oil since 2020.
This coming Sunday’s meeting is projected to show a further curbing of roughly 2 million barrels-a-day of oil output by Saudi Arabia and its partners, and following three straight days of Crude losses, as shown by Light Crude Oil Futures on the daily chart (NYMEX) prices look to be near support.
While prices might not immediately rally back to April highs, I do suspect a bounce to the low-to-mid $80’s in June. Moreover, it’s important that weekly momentum gauges start to turn back higher in Crude soon to avoid a larger decline.
Consumer Discretionary has turned back up sharply vs. Consumer Staples after having reached support
As discussed yesterday, Discretionary on an Equal-weighted basis has proven to be the “least worst” of any of the 11 ETF’s that represent the S&P 500 in the past week in data through 5/30/24. RSPD returned -1.16%, which far surpassed the -2.59% return of the Equal-weighted S&P 500.
When looking at Consumer Discretionary vs. the S&P 500, (chart below) we see that Discretionary moved back to multi-week highs this past week, having held former lows and bounced off those levels. (Ratio shown is Equal-weighted Consumer Discretionary ETF (RCD) vs. Equal-weighted S&P 500 (RSP).)
Following a very difficult start to the year for Discretionary given some underperformance in key names like NKE, TSLA, ULTA, MCD, and SBUX, all of which are down 10%+ Year-to-Date through 5/31/24, I expect a rally in all of these names in the month of June.
Weekly charts of RSPD to RSP will officially confirm monthly TD Sequential buy signals for Discretionary on any end-of-month June close at a new four-month high close in relative terms to RSP.
Overall, while I can’t project a push back to new 2024 highs for this sector, I feel that the underperformance in Consumer Discretionary is overdone, and I feel that this past week’s outperformance could be helping this sector “turn the corner” in the short run.
TSLA remains part of my UPTICKS technical stock list and I expect above-average performance out of TSLA in the month of June.
