For most of the year, I have been looking for the S&P 500 to close above the 4200 level. It has taken longer than I expected as on Friday, ahead of the Memorial Day weekend, it closed at 4205. The weekend news about the deal to avoid a debt default is promising but a vote is unlikely to take place until Wednesday. This may make traders nervous early in the week as the bill is likely to be criticized by both sides.
One of the complaints about the market rally in April and May has been the fact that large tech had dominated the rally. Both the growth/value ratio analysis, as well as the relative performance analysis, favored growth ETFs like the Invesco QQQ
QQQ
Trust (QQQ), iShares Russell 1000 Growth (IWF
IWF
), Technology Sector Select (XLK
XLK
) and Communications Services Sector (XLC
XLC
).
They were all identified as Teflon sectors at the end of March. The 2nd quarter is not over yet but QQQ and XLK are up 8% or more since the end of April versus just a 1% gain in the Spyder Trust (SPY
PY
SPY
). All except SPY closed last week above their weekly starc+ bands confirming they are stretched on the upside. None are above the monthly starc+ bands which means that they can still go higher but the odds of a sharp correction have increased.
The QQQ closed at $348.40 and near the upper boundary of the trading channel. The weekly starc+ band next week is at $353.89 with the March 2022 high at $371.83. There is initial weekly support at $325 with the 20-week EMA rising sharply at $313.60 which is a bullish sign.
The combined advance/decline analysis has been positive for the market since the October lows but there have been several periods of rotation. Therefore the A/D lines have failed to maintain a sustainable trend. The Zweig Breath Thrust (ZBT) signal at the end of March provided further confirmation as the prior signal in early 2019 led to massive gains.
However, there has been rotation amongst the different A/D lines and the performance of the weekly Nasdaq 100 Advance/Decline line for the past several weeks has been disappointing. It has shown little change over the past two months as it has stayed above its WMA but below the March high.
The relative performance (RS) analysis, which has been frequently featured, broke its downtrend in January. This confirmed the daily RS analysis that QQQ was a market leader. The weekly RS is acting very strong but is also extended on the upside as it is well above its rising WMA,
The QQQ closed well above its daily starc+ band with the daily trading channel in the $360 area, line a. It closed 5.6% above the 20-day EMA at $330.04. The June pivot, based on data through 5/26 is at $337.69 with last Wednesday’s low at $329.56.
The daily Nasdaq 100 A/D peaked in early February (line b) and has been unable to move above that high forming a bearish divergence. I expected to see better A/D numbers as QQQ accelerated to the upside late last week. Instead, the support at line c was reached. The A/D line turned up but is still below its WMA. This makes the action early in the week more important.
An upside breakout in the A/D line is still possible and the daily RS indicates that if the overall market does correct QQQ is likely to decline less than the SPY.
Interest rates moved higher last week consistent with the bottoming action in the MACDs and MACD- His that was noted early in the month (see chart) The move in the 10 Year T-Note yield above 3.65%, line a, confirmed the bottom and makes a test of the 3.85-4.00% area quite likely.
There is likely to be some pressure on the bond market in the next few weeks as the consumer spending and PCE report suggested inflation is still stubbornly high. There will be a surge in new issuance by the US Treasury in the next few weeks. There is also a packed economic calendar as ahead of the jobs report Friday, we get Consumer Confidence, Chicago Business Barometer, and ISM manufacturing.
Though the market does look vulnerable over the near term I am still positive for the intermediate term as I expect the overall market to be higher later in the year. I continue to monitor the value sectors for any signs they are bottoming out.
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