EB Daily Market Report - Special Report - Thursday, August 4, 2022
I wanted to summarize many of the positives and negatives in the stock market right now. Let's do opposite the media and start off with the positive news.
Rotation Remains VERY Bullish
All of my key sustainability ratios continue to set new highs. This suggests to me that the current rally is sustainable, even if weakening momentum on the hourly charts correctly predicts a period of consolidation or selling in the very near-term. Here's a quick update on those ratios:
The ratios couldn't be much stronger.
Discretionary and Technology are the Clear Leaders
Look at the past month's sector leaderboard:
This is all about a RISK ON market environment and that is EXCELLENT news for the bulls and those looking for the secular (long-term) bull market to resume. All 5 aggressive groups are in spots 1-5 and leading. That comes on the heels of the mid-June bottom that saw rotation to many of these same sectors as well.
Crude Oil and Interest Rates Falling
Yesterday, crude oil ($WTIC) closed below $93 per barrel for the first time since the February 5th close of 91.59. Rapidly-declining oil prices will halt the inflation rhetoric in its tracks. Meanwhile, bond traders are again buying up the 10-year treasury as its yield ($TNX) has tumbled 17 basis points since testing overhead yield resistance at 2.85%, which was right at the declining 20-day EMA. Here are those two charts:
Meanwhile, the TNX remains under pressure and is falling....
The rising TNX sent NASDAQ shares tumbling relative to their S&P 500 counterparts. But you can now see how the NASDAQ has responded much more favorably on a relative basis to the falling TNX.
These are just a few reasons why I believe we will see much stronger price action in equities throughout the balance of 2022. There will be periods of weakness, however, and when they appear, the bears will be screaming that the bear market rally is over. Whatever. If we get enough weakness to see a 20-day EMA test, I'll be jumping back into the leveraged QLD (ETF that tracks the NASDAQ 100 at a 2 to 1 clip).
Short-Term Momentum Has Turned Bearish
This is my one big worry in the very near-term. The fact that it's coming just before the August jobs report leaves me wondering if the market is going to sell off no matter what the news is. Here are the negative divergences across key indices/sectors/industries:
S&P 500:
NASDAQ 100:
Technology (XLK):
Discretionary (XLY):
Computer Hardware ($DJUSCR):
Apple (AAPL):
Microsoft (MSFT):
Tesla (TSLA):
The hourly negative divergences are everywhere. And seeing them show up ahead of a major economic report - the August nonfarm payrolls - really makes me nervous. Again, I'm not a fan of shorting stocks in a secular bull market - and I believe we've resumed that secular bull market off the mid-June low. I won't be shocked, however, if we see a period of 1-3 days upcoming where the bulls are held back.
I certainly do not want to confuse anyone. I LOVE U.S. equities for the balance of 2022 and into 2023. I believe we are going A LOT higher. These negative divergences, and any market weakness that might result, is a very short-term issue. We might consolidate, see a brief 3-5% pullback, or ignore the momentum issues altogether. As I've said previously, long-term investors should simply stay the course on the long side, in my opinion. Traders, however, might want to be a bit more cautious near-term.
Hope this all helps to explain where I stand currently.
Happy trading!
Tom