Category: Newsletter

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.

As shown, the market's monthly seasonality supports that view of a potential correction later this summer. July tends to be a decent performance month, with an average return of more than 2%.

Last week, we discussed the issue of the negative divergences and bad breadth of the market. As discussed, these negative divergences have often preceded short to intermediate-term corrective market actions. At this point, investors tend to make two mistakes. The first is overreacting to these technical signals, thinking a more severe correction is coming. The second is taking action too soon.

As discussed below, that inflation report and Fed meeting sent stocks surging to all-time highs. While the bullish trend remains intact, along with a MACD "buy signal," which suggests an increased allocation to equity exposure, we have some concerns.

While the market set marginal new all-time highs this past week, the upside likely remains somewhat limited in the near term, given the more overbought conditions. On Friday, the market flipped back onto a MACD "buy signal," suggesting that the rally remains firmly intact, with the 20-DMA continuing to act as the primary support. Furthermore, volatility remains significantly suppressed, indicating that traders are not worried about a significant decline anytime soon. However, with that said, the FOMC meeting and inflation reports are next week, which will have an outsized impact on the broader market. Therefore, continue to manage risk accordingly.

Last week, we discussed consumer data suggesting the economy was weakening. This past week, downward revisions to Q1 GDP and weak personal consumption expenditures (PCE) reports confirmed that suspicion.

Last week, we discussed that the markets surged to all-time highs as a plethora of disappointing economic data and a weaker-than-expected inflation print lifted hopes of Fed rate cuts in the coming months. Over the last few trading days, the markets had to focus on the minutes from the previous FOMC meeting and earnings from Nvidia.