MONDAY:
The stage is set this week for NASDAQ to attempt a break higher and the NYSE indices to make the test of the April lows. We felt another test was coming, but also felt the bounce had more strength and also needed to be higher than this to better set a bottom. Without any relief from the Fed, the market's inability to accept any good news with upside moves, and distribution returning last week, the positive climate demonstrated with the follow through is now on the defensive. In short, it has to prove itself by holding the test and showing an even stronger move than the recent rebound and follow through that are now on the ropes.
Some will look at NASDAQ's move Friday as a turning point where NASDAQ assumed the mantle of leadership. All it did was hold on, however. It has not made the move to verify that as the case, and with SP500 distributing, it has its work cut out for it. Again, this test by SP500 and SP600 is what we have been talking about the past four weeks. It holds or it folds at this level.
On the test we expect an undercut of the low; as noted above, breaking below key levels often initiates a short covering rebound. That will tell the tale as to whether the market is going to make a stand or continue lower, further building in the sharp economic slowdown it and the bond market are closer and closer to confirming. That is the power of the Fed's track record.
In defiance, many stocks continue to fight the Fed, holding up quite well despite the NYSE selling. Indeed, the drop last week has worked to set up some leaders in good position to bounce after a further market test that holds the April lows. These leaders will provide good opportunity if the NYSE indices can hold and make the rebound. It won't hurt NASDAQ either, as it is in better position to lead given its relative strength.
This is what the market has been building up to. Change started to emerge in late April and a solid rebound and follow through set the market up for this test. This will either be enough to price in the upcoming slowdown or it will fail once more. If it is enough to price it in, then the stronger economic data and falling gold prices will have foretold a good economy with low inflation in spite of the Fed rate hiking. We have to be patient, protect positions, play a bit of defense, and be ready if it makes the test and rebounds with another strong surge that sends leaders higher.
With the Fed still hiking and the Fed Funds Futures adding on another rate hike to the list, your gut tells you the market is in trouble given the shorter rebound bounce off the April lows than you would expect or want. As we often state, however, let the market be your guide. Right now we play some defense, let it make the test, and see how that pans out. Even as it makes that move we have some opportunity to make some good money. |
