Party Over?

The recent runup to new highs in both the S&P 500 and the Nasdaq 100 came to an abrupt halt this week, and our Risk Gauges flipped negative in short order. It is also important to note the selloff in the SPY is not overdone and has a lot more potential downside (SPY, SPX, NDX, QQQ).

Dices Over Newspaper, Profit, Loss Risk

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Even more critically, IWM looks extremely vulnerable, which is testing a well-formed valid 6-month trendline that has helped keep the rally intact. If it breaks, there is a good chance that it will drag the other key benchmarks down along with it.

Weak seasonals around presidential cycles are also kicking in right now, yet another headwind.

Also, our reliable TSI (Trend Strength Indicator) is on the verge of flipping negative on Russell 2000 index, yet another major warning (IWM).

Only two sectors were positive on the week, and both are risk-off plays; Utilities (XLU) and Consumer Staples (XLP), yet another major warning.

Soft commodities (DBA), and gold (GLD) also bucked the selloff while (KRE) Prodigal Son/Regional Banks, which likes higher margins on higher rates fell, indicating a dovish Fed despite inflationary pressure.

All this shows that the Fed is ignoring the recent inflation numbers and hoping that “transitory inflation” is underway, unlike the 1970’s.

Considering the Virus is still NOT under control, it’s NOT a shocker that Risk-off has been tripped, and stagflation could be rearing its ugly head.

At any rate, that is how we are reading the tea leaves at the moment.

This Week’s Highlights are the following:

  • Risk Gauges reversed to Risk-Off in quick order
  • All key benchmarks closed down on the week led by Grandpa Russel (IWM), down -5.2%
  • Prior positive volume patterns reversed across the board, with IWM now showing zero accumulation days
  • Market Internals which include the McClellan Oscillator, and the 52-week new high/low ratio, continue to languish in bearish territory
  • Value (VTV) continues to lag Growth (VUG) which is bullish
  • Even with ongoing infrastructure talks, Transportation (IYT) was down again last week
  • The only sector in the modern family still in a bullish phase is Biotech (IBB) led by Moderna (MRNA), whose vaccine for COVID is most effective
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