So we ended May with a price candle called a “hanging man.” As the name might indicate, it is not a bullish candle. It would portend a few months of consternation ahead, just as we are expecting.
I would put yesterday’s action in the WWSHD (When What Should Happen Doesn’t) category. The first day of a new month should be strong. It wasn’t, save for energy, basic materials, real estate, and financials. Those sectors tend to be late-cycle. Financials are on thin ice, as the critical spread between 10 and 2-year treasury rates has been narrowing lately. The banks make money on the spread, so the preference would be that it widen.
Perhaps more importantly, in the S&P 500 index, we had another “look above and fail” per our balance rules. As pointed out in yesterday’s pre-market outlook, we expected the holiday and Globex traders to fade the gap and take profits (old business) and hoped the new monthly inflows (new business) would buy the breakout above balance. That didn’t happen. But for the daily 5-EMA support, the market would have rolled down to the balance area lows around 4179. That could still happen in today’s session.
That leaves us with a 50 point trading range in the last six sessions roughly bounded by 4180 and 4215. You could also define it loosely by going back to April, with a southern boundary of 4120 and 4220 to the north. What is more certain is the importance of the trendline coming up from the March 3rd low and connecting the lows from May 13th and May 19th. The trendline also tracks the 50-day line reasonably closely at the moment.
As Edwards and McGee pointed out in their seminal work on technical analysis, when a trendline is touched once, it might be chance, twice it might be a coincidence, but three times and it becomes a good pattern.
The Founder’s Group is still focusing on the daily 5-EMA as our line in the sand for the Navigator swing strategy. Partly, that is due to our leverage in the S&P 500 futures contract. For non-leveraged, very long-term portfolios, a close below 4120 would be my maximum tolerance. The 50-day line and the trendline mentioned above congregate there. A compromise might be a close below the 21-day line – smack in the middle between the Founder’s Group line in the sand and the unconditional support at 4120.
For the moment, then, financials, metals/materials, real estate (XLRE), and energy are leading the charge. These sectors help drive the IWM (Russell 2000 ETF) higher. Crypto is still bleeding, perhaps forecasting trouble. Commodities (check out the DBC ETF) hit new highs yesterday – energy undoubtedly boosted the gains. I am still buying Freeport-McMoran (FTC) and PAVE (infrastructure ETF)on dips to the 21 or 50 – as the charts dictate.
I am continuing to keep leverage at a minimum unless I am right in front of the computer.
As a side note, Apple (AAPL) looks like it could be forming a head and shoulders topping pattern. Keep an eye on it. It is hard to imagine the broad market gaining much without Apple.
There is no big move to defensive sectors yet, just the continued rotation from growth to value style stocks and back.
The SKEW index is still historically high, so there is a significant premium to be had for premium sellers. In part, that is causing the trading range to become self-reinforcing. Market makers fight prices above the range to keep the premiums they have sold to retail investors.
Candidly, if you don’t need the money, this is an excellent time to put everything on the shelf and do something else. I am not an enthusiastic buyer, but it is a bit early to get aggressive on the short side. Again, never discount the possibility of a trading range for the summer, finishing in a fall correction.
A.F. Thornton