Is The Selling Over Or Just Starting?

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The stock market was able to survive the latest FOMC meeting and gyrating interest rates the prior week setting the stage for this week’s selling. Before the week started it seemed like both traders and investors were set up for a market decline as stocks didn’t need any real catalyst to turn lower.

There were warning signs ahead of the long weekend as the starc+ band analysis made it clear that several key market averages were stretched on the upside. Just a month ago many thought the S&P 500 would not get above 4200 or 4250 so last week’s high of 4448.47 was painful to those on the short side.

The close above 4250 on June 2nd was likely enough to convince those on the sidelines to finally get long this is confirmed by the fund flows for the past several weeks that revealed $ 4.4 billion moved into the market from retail investors. Over the weekend some were wondering if these late buyers just got in at the top. After a 40% rise in tech shares fund managers were likely under pressure to increase their long exposure before the end of the quarter. They are likely to be buying again this week.

For the week, it was all red led by a 2.4% decline in gold shares while all the other markets had solid losses. The Dow Jones Industrial Average dropped 1.7% a bit more than the S&P 500, and the NASDAQ

Some recently been hoping for a resurgence in small caps, like the iShares Russell 2000 ETF (IWM
). The rebound in IWM was not supported by my technical work that did favor buying and it lost 1.9% last week. Even the Dow Jones Utility Average was down last week and is still the worst performer year-to-date (YTD)

The market internals were solidly negative last week with 2168 issues declining and just 920 issues advancing on the NYSE Composite. These numbers were weak enough to turn the daily and weekly advanced decline lines lower but the new all-time high in the S&P 500 Advance/Decline line is bullish for the intermediate-term trend.

The Spyder Trust (SPY

) had a relatively narrow range last week after the prior week’s sharp new high at $443.18. This high was accompanied by a move above the weekly starc+ band. There is weekly chart support now at $428.58 and then $424.24, the three-week low. The strongly rising 20 week EMA is a positive technical sign and it currently stands at $413.70.

The weekly close on June 16th pushed the S&P 500 A/D line to a new all-time high, line a. Based on my approach to advance/decline analysis this is a sign that the SPY will ultimately surpass its prior all-time high at $468.78. A similar signal was generated in February 2019 after stocks had plunged in the last quarter of 2018. The A/D line declined last week but is still above its EMA while the daily is now in the corrective mode.

The weekly NYSE Stocks Only A/D line has been comparatively weaker than the S&P since the October 2022 lows. It closed last week below its EMA with important support now at the March lows. The NYSE All A/D line is still above its EMA and the support at line d. The market internals should be watched closely in the week ahead.

The Invesco QQQ
Trust (QQQ) slightly exceeded the April 22 high (line a) with the June 16th close. The weekly starc+ band was exceeded after being tested several times over the prior five weeks. This was a sign that QQQ was stretched on the upside. There is four-week support now in the $346 area which is 4.5% below Friday’s close.

The NASDAQ 100 Advance/Decline line reached its long-term downtrend a week ago, line c, before turning lower. It is not far above its rising WMA. The weekly relative performance analysis (RS) is still in the clear uptrend indicating that QQQ is outperforming the S&P 500. There are no signs of a change in trend as the daily RS analysis also favors QQQ.

The growth/value ratio chart of the iShares Russell 1000 Growth (IWF
) versus the iShares Russell 1000 Value (IWD
) made a new high last week indicating that growth is still leading. Over the past several weeks there has been some loss of momentum as the ratio is well above gets rising 20 week EMA and a bit extended. The weekly MACD -His has been diverging, line c. Better performance of IWD versus IWF in the next several weeks is needed to support the view that a top is forming.

This would be an interesting development as many on Wall Street have been fighting the pro-growth trend for much of the year but have recently become convinced. A turn in favor of value could make them poorly positioned if value started to lead growth.

The 10 Year T-Note Yield was a bit lower last week as it has been range bound for most of June. The downtrend, line a, and the R1 are in the 3.899% area. A decisive close below the pivot at 3.597% is probably needed to confirm a move to lower yields. That would be consistent with the loss of upside momentum that is evident in the daily MACDs which are negative.

So was the recent correction just a dip to buy or the start of a more meaningful correction that could take the SPY another 3-5% lower? The extended market state was a reason to take partial profits on strength in markets like QQQ, IWF, SMH
and XLY
even though we exited before the highs. A day or two of strong action could flip the daily analysis back to positive.

The combined impact of the new highs in the S&P 500 A/D line and the March Zweig Breadth Thrust Signal (ZBT) indicates that even a deeper correction should be a buying opportunity as stocks move higher into the end of the year.

In winding up my weekend scan analysis I noticed that Goldman Sachs (GS) has triggered a weekly doji sell signal. The close last week at $314.71 was well below the prior week’s doji low at $335.69. The weekly chart shows what appears to be a bear flag formation that would be confirmed by a break below support at line b. That would project a move to the $280 area if not lower.

The weekly RS dropped below its support, line v, and its WMA in March. This was a strong signal that GS was going to be weaker than the S&P 500. So far in June GS is down 2.8% while the S&P 500 is up 4%.

The weekly OBV is still above its WMA but has been weaker than prices all year with resistance at line d. The daily technical outlook for GS is negative but is oversold as it has tested the daily starc- bands for the last three days.

By the middle of the week the market internals should help us determine how we will close the week and whether the correction is already over.

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