Just A Tech Pullback Or More?

The combined impact of slightly higher than expected unemployment claims on Thursday and Microsoft MSFT (MSFT)’s decline helped to push stocks lower late in the week. The failure of the Senate to extend the recovery plan by the end of the week did not help the outlook for the stock market.

With just two weeks now before the release of the July jobs report, some are concluding from the weekly and other high-frequency data that there could be a loss of jobs. Grant Thornton’s chief economist Diane Swonk’s review of weekly Census Bureau data suggests “we lost 6.7 million jobs” by early July.

Selling last week was focused on the technology and biotech stocks, as the Nasdaq 100 Index ($NDX) was down 1.5%, while the S&P 500 was down just 0.3%. The Dow Jones Industrials, Dow Jones Utility Average, and small cap iShares Russell 2000 were all down less than 1%. The SPDR Gold Shares GLD (GLD) was once again the big winner, up 5%. It is now up 25.1% year-to-date.

The key daily reversals on Monday July 13 (“How Monday’s Trading Warned Of Tech Trouble”) in the Invesco QQQ Trust QQQ (QQQ), which tracks the Nasdaq 100, and in Amazon.com (AMZN) was a potential warning for the tech sector.

The Nasdaq 100 was also down 1.8% the prior week, after coming within 1% of its weekly starc+ band. The weekly relative strength index (RSI), peaked above 80, but then formed a negative divergence at the recent highs (line a). It has since turned down from its high and is testing its weighted moving average (WMA). The Nasdaq 100’s weekly Advance/Decline (A/D) line has continued to be positive, making new highs with prices.

Using data going back to 1986, the NDX has a seasonal tendency to top out between May 29 and July 10 (lines b and c). The major seasonal low comes in October. There is good weekly support at the February 2020 high of 9736, which is 7.1% below Friday’s close.

The Spyder Trust (SPY) made a new rebound high at $327.23 last week, before closing a bit lower. The three-week low is at $310.68, with more important support at $302.95. This corresponds to chart support (line a) and the 20-week exponential moving average (EMA), which is rising.

Last week on the NYSE, there were 1805 issues advancing and 1254 declining. The NYSE All-Issues Advance/Decline (A/D) line made a new high last week. The A/D numbers for the S&P 500 were slightly negative so the weekly S&P 500 A/D line was a bit lower. The A/D line is still in a positive trend, holding well above its rising WMA and the multi-month support (line b).

The more value-focused sectors were the leaders last week, with the Energy Sector (XLE) up 2.2%, followed by a 1.3% gain in the Financial Sector. The spread of Growth (iShares Russell 1000 Growth IWF) versus the Value (iShares Russell 1000 Value IWD) peaked at 1.8138 on July 9 and closed last week at 1.6980, just above the week’s low.

The support from the May high at 1.6751 (line a), has been reached with the uptrend from the February low (line b) in the 1.6200 area. A decline below the April low of 1.5307 is likely needed to signal a major trend change towards value-focused stocks, away from high growth stocks.

The Price Momentum Oscillator (PMO) peaked in March and formed lower highs in May and July (line c) which is a negative (bearish) divergence. The PMO is still declining sharply and shows no signs yet of bottoming.

Interest rates have traded lower this month, as the 10 Year T-Note yield closed on the month’s low last week at 0.589%. The March low yield was 0.398%. The monthly Moving Average Convergence Divergence (MACD) lines and MACD-Histogram turned negative at the end of January (line b) as key weekly support was broken during the month (see chart). The monthly indicators show no signs yet of a bottom. The June high was 0.957%, with the downtrend (line a) at 1.299%.

The lower yields and weak dollar have helped move the precious metals sharply higher, as the iShares Silver Trust (SLV) was up 17.8% last week. That was consistent with the bullish weekly chart from two weeks ago. Sentiment on the metals is starting to get a bit too high, in my opinion, so a sharp correction would not be surprising. The weekly analysis suggests that such a correction should be a buying opportunity.

Lots of data is coming out this week, with Durable Goods on Monday, followed by Consumer Confidence on Tuesday, when the FOMC meeting starts. On Wednesday we get the FOMC announcement and Fed Chair Powell’s press conference. The GDP and new jobless claims come out on Thursday, with Consumer Spending, Chicago PMI, and Consumer Sentiment on Friday.

Even though there are no signs yet of a significant market top, I am concerned that there will be clearer signs of a stalling economy in the weeks ahead. There are a number of signs that the stock market is overbought and overvalued. Therefore I would concentrate on protecting profits and focus on the risk more than the reward.

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