We end the month and the second calendar quarter on Wednesday. This also brings us to the mid-point of the year. There may be some window dressing by money managers to complicate life this week, so carry that forward. I will be coming out with a mid-year outlook video later this week.
At this time a week ago, we were hanging by a thread – with most indications set to take us lower. Of course, a lot of the immediate negatives were established on quadruple witching Friday. So the reliability of what we observed came with a question mark. But there were also macro signs of deterioration and some early warning signals for an intermediate top. Instead of following through to the downside, the market made a complete turnaround.
It is possible that the early warning signs of a deteriorating market developed on expectations of a more negative outcome for the Fed meeting than occurred. After sputtering (and a lot of back-peddling), perhaps the Fed pronouncements were better than expected. All we can do is theorize. Some of the internal market deterioration has turned around, but much has not. Certainly, the situation has improved over the previous week at this writing. But we must also guard against a bull trap.
As well. The previous week’s price action blew out the downside of the expected move. This past week blew through the upside of the expected move. So market makers have taken it on the chin for two weeks in a row. With option pricing models missing the mark, we are navigating an inefficient market at present.
This week, the market makers have set a 53 point range up or down from last week’s close. The previous week the range was 90 points. That is a huge difference in forecast volatility – especially when the market is exceeding the estimates. Such behavior has led to corrections in the past – and that should be noted.
Volume was pathetic all last week, including on the break-out to marginal new highs. With all the institutional trading in dark pools these days, it is difficult to gauge whether the lack of volume will be meaningful, but it should be noted. Also, the lack of volume could be attributed to the summer doldrums. We like to see markets break out on good volume. It gives us more confidence.
But I have also noted that the short-term crowd dominates the trading right now, rather than institutions. The short-term traders are considered “weak hands.” As such, the market is vulnerable to sharp liquidation breaks. Keep your guard up.
Over the past few weeks, the dilemma has been whether the FAANGMAN+T growth leaders could stimulate a broader-based rally. I don’t think we have quite confirmed that they have – but we are closer to that outcome. One of the possibilities I have considered is whether the 18-month cycle correction just bottomed, with the cycle trough more apparent in the individual stocks and sectors than the major indexes like the S&P 500. That is not the most probable case, but keep the possibility in your back pocket.
On the monthly charts, we see a buying climax at 3 ATRs from the mean. There is also a 3 ATR climax on the weekly charts. We also have a Navigator sell signal on the weekly charts, which is rare. The Daily chart still shows a rising wedge within a rising wedge. While there is a weak Navigator buy signal on the daily chart, it is not coming from oversold territory. All of this suggests that we be very cautious about taking long trades. The risk is high, as it has been the past month.
In summary, then, I cannot see becoming overly bullish on the turnaround last week any more than it made sense to get overly bearish a week ago. I remain neutral, to slightly bearish based on everything I see at the moment. I need a bit more evidence of a solid, sustainable break to new highs in the S&P 500 to dip my toe in the water.
If I am going to drop a line in the water, I want to do it on a liquidation break – which likely is close at hand. I sometimes like to buy a single call or put on the SPY (S&P 500 Index ETF). I literally view it like fishing. It gives me a better feel for the market than simply sitting in cash. Last week, I bought a put twice, testing two different levels for short positions. Both failed, and it cost me about $150 to fish. But it helped me get a better feel for the situation at hand. And had there been a good pull on the line, I would have been aggressive.
Summarizing where we are, there is no definitive intermediate top yet in the S&P 500 index, just many early warning signals that we may be close. And conditions are such that we might expect one. We have discussed that incessantly. But we have to trade what is unfolding directly in front of us. Right now, that is bullish. We are better able to take advantage of this in the day-trading strategy without exposing ourselves as we do in the swing-trading model.
If we get a decisive breakout, and the situation appears solid, we have about 200 points or 5% of a measured move to explore overhead. On the downside, the intermediate line in the sand has developed to be the low we had a week ago Friday, now last week’s low and likely the low for June. That level is 4126.75 in the futures. To get there, we would have to take out the 5, 21, and 50-day EMAs and the Navigator trigger line. That would not be easy, except in an intermediate decline that moved down decisively and quickly.
If you are long, set a tight stop – maybe the 5-day line on the S&P 500 or other instruments you are trading. If you are in cash, we will let you know if a good swing-trading signal develops early this week on a dip.
A.F. Thornton