Weakness Likely in the Near-Term
As mentioned in our last update, Technology Getting Tired, the stock market reached a level where I expect major market indexes to pullback.
Below is a chart of the S&P 500 ETF (SPY) in the upper panel and the MACD (momentum indicator) in the lower panel. Here are my takeaways:
- The blue up-trending lines are a price channel that defines the market’s current advance. The index is at the top of that channel and at resistance after an extended advance which suggests the index is overbought and due for a pullback.
- The two previous times the index reached the top of this channel it fell to the lower end of the channel.
- Momentum is at a level that confirms the index’s overbought condition and is also rolling over. The short-term path of least resistance is now down.
What to Watch For
Bullish Scenario: If the index pulls back to the lower half of the channel and bounces it would indicate the longer-term trend is still up and the pullback should be bought.
Bearish Scenario: If the index falls decisively below the lower end of the channel it would signal a possible change in trend.
Sector On The Move
One sector that is outperforming is Energy. Below is a chart of the Energy ETF (XLE) in the upper panel. After falling this year, the sector advanced strongly above its downtrend line and has been outperforming the market recently.
Client Account Update
Client accounts own stocks/funds in those sectors/industry groups that are displaying strength and index short funds as hedges. Our biggest sector allocation is Energy and we are shorting the S&P 500 and Nasdaq 100. I have increased our shorts over the past few weeks to account for what I feel will be stock market weakness in the near term.
If the bullish scenario plays out (pullback to the lower end of the channel and advance), I will increase our equity exposure by selling our shorts.
If the market falls decisively below the lower end of the channel (bearish scenario), I will hold our shorts and maintain our current defensive allocation.
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Craig Thompson, ChFC
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