Category: Newsletter

This past week, the market struggled to make gains, and as shown, its momentum has slowed. While such does not mean a significant correction is imminent, it does suggest that the upside is likely limited. Investors should expect a continued consolidation or pullback to previous support levels. Notably, a negative divergence is developing between momentum, strength indications, and market performance. We last mentioned such a negative divergence was in late July before the August correction.

As noted last week, the rapid rally from the lows of three weeks ago had some good and bad elements. The positive is that the rally reversed the MACD "sell signal," suggesting the bullish bias has returned. Furthermore, the rally cleared all-important resistance levels with ease. The market quickly crossed the 100, 50, and 20 DMAs, leaving only recent all-time highs as significant next resistance. The only negative to the advance is the nearly complete reversal of the previous oversold conditions. Such isn't a critical issue, but it suggests we will likely see a minor pullback to retest support at the 50-DMA. Such will provide a better entry point to add exposure as needed.

As noted last week, events like the "Yen Carry Trade" blow-up are temporary and rarely devolve into more extreme market corrections. However, there is always that risk, so we suggested rebalancing portfolio risk as needed. As we will discuss today, the good news is that the 5-10% correction we warned about in June and July is likely complete.

As noted last week, the correction continued. While we did get that reflexive rally, it came after an unexpected event shocked markets into a deep selloff on Monday.

As noted last week, the continuation of the market correction is unsurprising. Such happened this past week, with a strong rally on Wednesday that failed. What is clear is the market is starting to recognize that Federal Reserve rate cuts are not bullish for stocks. As we have discussed, when the Fed cuts rates, it often coincides with weaker economic activity, which precedes a decline in earnings growth. The drop in the ISM manufacturing index and a terrible employment report bolstered those concerns. Unsurprisingly, the market is beginning to discount the impact on earnings by reducing stock prices.

Previously, we noted that a pullback was needed to resolve the market's overbought and extended conditions. As expected, the correction accelerated this past week as the 20-DMA failed to hold.

On Friday, the market broke the 20-DMA and flipped the MACD indicator back onto a short-term "sell signal." While we will likely see a rally early next week, a failure to close above the 20-DMA may suggest a further correction to the 50-DMA. A further correction is possible with the market oversold and triggering a fresh sell signal. Those triggers led us to take profits out of several positions this past week to hedge against a further decline. We will raise cash levels further if technical deterioration continues.

This past week, the market broke above 560 as Jerome Powell's testimony confirmed rate cuts are coming.

First, while markets hit an all-time high, I wouldn't read much into it. Trading volume was light due to the shortening of the week for the Independence Day holiday week. Secondly, while the market did make a new high, it remains a marginal new high tracking along the 20-DMA, which continues to act as bullish support.