Bipolar Markets

Warnings from the VIX & The Transports

Today we’ll go over Market Conditions, global markets and discuss warning signs provided by the VIX and the Dow Transports.

Market Conditions

The S&P 500 (SPY) powered forward on positive CPI news and endured through hawkish Fed speak this week as it ended up 1.64%. You can see from the chart below that the SPY continues to trend higher on the 9 and 21 EMAs. It is above the Ichimoku Cloud, telling us that pullbacks will be met with support. MACD shows bullish momentum. However the RSI is now in overbought territory and a pullback or sideways consolidation may be needed and to continue the uptrend in a healthy manner. Weakness in breadth, evidenced by a declining McClellan Breadth Oscillator and Net New Lows in the S&P 500 and Nasdaq 100 increase the odds that we’ll get a pause or pullback, as we enter the corporate stock buyback blackout period next week. The blackout will reduce willing buyers until earnings season.

From a seasonality standpoint, we usually run into weakness around this time. Weakness in mid-June could set up a good Independence Day Rally.

If markets continue to have their bullish character, the pullback could take the SPY back to the 21 EMA or the lower channel line, which are only a 2% to 2.3% drop. This could occur as the cycle bracket gets aged and renews on 6/21. Note that there is often selling pressure in the last 20% of cycle brackets. Finally, looking at the Distance from the 21 EMA indicator (red line), we can see that the SPY is stretched from the 21 EMA and at a place where it pauses or pulls back.

Weakness around this time is consistent with our cycle forecasts, as provided in our June 2024 Cycle Forecasts article.

Bi-Polar Markets

The Nasdaq 100 (QQQ) is leading the pack right now, as it is heavily weighted in the top mega-cap growth stocks. The cycle bracket renews around 6/20, but given the bullish momentum, we don’t expect much give-back. Perhaps a sideways consolidation may occur to work off overbought RSI conditions.

Meanwhile the Russell 2000 (IWM) has blaring relative weakness. Notice it is below all moving averages and the Ichimoku Cloud as the RSI and MACD point to weakness. More weakness is expected going into 6/21 when the cycle bracket renews. This tells us that the stock market does not have an appetite for negative earnings companies. Valuation matter at the moment. IWM is forming a multiple top pattern and if it breaks below the 200 EMA, it could get ugly.

What is more interesting is that stock markets around the world are breaking down. The German stock market (EWG) began dropping as it crossed it’s half-cycle bracket’s midpoint. It is now sitting on the 200 EMA and below the Ichimoku Cloud. If it finds support here, look for an RSI bullish divergence to form here as the cycle bracket renews. This has not happened yet and momentum still looks quite bearish. The downside may not end if EWG follows the European leader — France.