Cautiously Bullish
Time To Build A Buy List As The Market Finds Its Legs
The S&P 500 (SPY) rallied 2.65% this past week after being down for 3 weeks. Artificial Intelligence and Technology stocks led the way as money stocks piled back into these areas. Another risk-on rally may be brewing as the new leaders appear to be the same old leaders that led the previous rally. However, are we out of the woods yet?
Intermediate Cycle for the S&P 500
The Intermediate Cycle for the SPY may have already bottomed. The weekly chart below illustrates how the 25-week cycle bracket marked lows during the week of October 23rd (low on October 27th) and possibly the week of April 15th (low on April 19th). The SPY closed above the 13-week Simple Moving Average (SMA, blue line), which could be seen as a confirmation that a new cycle is beginning. Historically, crossing the 13-week SMA—roughly half the length of the cycle—confirms that tops or bottoms are in. However, the price must remain above this moving average next week to confirm. Next week there will be Initial Jobless Claims on Thursday and Nonfarm Payrolls on Friday, which could bring volatility. If SPY can make a higher low, it would be constructive for this thesis.
The RSI indicator is above 50, which displays strength. However, the CCI indicator has yet to cross above the 0 mark. When it does, it will be another confirming signal that the Intermediate Cycle low is in. If another AI-led risk-on rally begins, it could last until the tail end of the next cycle bracket. This period is considered risky and would start around mid to late August. This would also align with typical Election Year Seasonality, as election uncertainty usually sends the market into a downtrend from late August to early September, ending with a 'Thank God It's Over' rally after the next President is selected. The expected cycle trough on October 7th could extend past the election, as it is quite normal for cycles to expand or contract. A more significant drop by November 2024 synchs with our work on the 4-Year Cycle: here.
Market Conditions
The fact that the Technology and Communication sectors led the way last week gives us confidence that investor sentiment may have changed, and a sustainable rally is setting up. This trend of course must continue to confirm the rally.
The Fear and Greed Model is also showing how fear reached an extreme and reversed, as greed now picks up momentum.
However, we are not out of the woods yet. The daily chart of the SPY shows that price is still below the 20-day SMA and 50-day SMA. All of the indexes (Nasdaq 100, Russell 2000, and Dow Jones Industrial Average) are below their respective 20 and 50 SMAs.
Most sustainable rallies trend above an upward-sloping 20-day SMA (refer to the chart below, which shows only the 20 SMA). Currently, we do not see this pattern. Three scenarios could unfold:
1) The SPY may need more sideways action to rise above the 20 SMA and turn it upward-sloping,
2) another downturn could occur, or
3) a massive show of strength could send the price of the SPY soaring above the 20 SMA.
At this point, it is wise to keep an open mind and see what the market decides.
The breadth of the S&P 500 is not very strong. Notice that the SPY Bullish Percent Index (a breadth indicator that also functions as an oscillator) is still below its 10-day EMA (blue line), implying that it remains in a downtrend. The RSI and MACD indicators do appear oversold and are setting up for a reversal. However, these indicators often undergo multi-leg down moves before a bona fide reversal occurs.
In comparison, the Nasdaq 100 Bullish Percent Index did cross the 10 EMA (blue line) and is starting a new uptrend.
Furthermore, the Nasdaq McClellan Summation Index is in the oversold zone, making a sustainable reversal here feasible.
Conclusion
The best traders and investors in the world look for stocks and ETFs demonstrating relative strength while the market is still in correction. Investments exhibiting early buying and relative strength often lead the next rally. It’s time to create a buy list to profit from the next rally, whenever it decides to show its hand.
We see three themes that are developing in the market right now:
Theme #1: Growth at a Reasonable Price (GARP)
Theme #2: Go Global
Theme #3: Artificial Intelligence
We’ll go over a few examples and provide more setups to our paid subscribers in the weeks to come.
Theme #1: Growth at a Reasonable Price
GARP buyers, often Smart Money or institutional players, purchase quality stocks with good growth rates at a discount and typically have a long-term timeframe.
META: META experienced a significant drop after its earnings report last week. Our Q2 2024 Cycle Forecast for META was quite accurate, predicting a peak on April 7th. The Energy Cycle (depicted in pink) and the Seasonal Cycle (depicted in green) are now indicating a strong up-cycle beginning around April 26th. Our Cycles Composite (depicted in blue) suggests an initial rebound followed by a period of weakness from May 2nd to May 15th, before another up-cycle begins.
This is how it played out:
You can check out our Cycle Forecasts here: https://cyclesedge.com/
In our Premium Section, we’ll continue with META, China (FXI), and Semiconductors (SMH).
Disclaimer - All materials, information, and ideas from Cycles Edge are for educational purposes only and should not be considered Financial Advice. This blog may document actions done by the owners/writers of this blog, thus it should be assumed that positions are likely taken. If this is an issue, please discontinue reading. Cycles Edge takes no responsibility for possible losses, as markets can be volatile and unpredictable, leading to constantly changing opinions or forecasts.