Summary

  • Last week was the first sign of potential weakness for stocks since April, but there must be follow-through price action to confirm this.
  • Rotation between the Nasdaq 100 (Growth) and the Russell 2000 (Value) continues to be a back-and-forth battle for sustained leadership.
  • Noise over who/what is driving stock prices higher is just that…noise!

Detail

While stocks have seen a record-setting rally since late March, there are a few signs that we may be nearing a period where a change of trend is upon us. This does not mean that stocks will dramatically fall, however, as evidence is building that major indices may need to consolidate for a bit, working off some of their momentum.

We mentioned early and often in April that we would be very interested in owning stocks if the S&P 500 could reclaim the 2600 level. On the 3rd attempt, we were able to secure that area and indeed the index did move higher. What is interesting is the rally was essentially kick-started with a very powerful price pattern, known as an ‘island reversal’. Last week, we saw an equal but opposite pattern develop in the same index. This rare occurrence was also discussed during the client section of the podcast distributed on Saturday, June 13th. Click here to listen to this episode of the podcast. Both patterns can be observed in the chart below.

 

 

 

 

 

 

 

 

While there is not yet nearly enough evidence that stocks will trade back down to their late-March lows, there could be some warranted skepticism on how much longer this uptrend can continue at the same pace we have seen since March. With that said, there have been a number of potential bearish reversal setups that we have seen on the way up which never saw follow-through to the downside, and this recent island reversal could be another example of that behavior. There still seems to be a wide variety of outcomes on the table over the short- and intermediate-term.

Here are some important levels we are monitoring:

Russell 2000: 1450
S&P 500: 1940
Dow Jones: 23300
Nasdaq 100: 9740

In other areas of the market, we continue to watch for a decisive trend between two important areas that are polar opposites: Large Cap Tech and Small Cap Value. While Large Caps have led for the last 3-4 years, Small Caps have had a recent comeback, which is quite normal during the bottoming process following a large decline in stock prices. While Tech looks somewhat “worn out” in regards to its relative strength, there has been no definitive shift.

One thing that we’d like to mention in particular is one piece of recent “noise” that has been going around. You may have heard talk that retail investors, and their unabated desire to own speculative stocks, is what is driving the market higher, and that this will eventually lead to another dramatic drawdown for stocks as a whole. While it is true that these types of “investors” are quite bullish, based on the data from various platforms, it is highly doubtful that they are the cause of stocks moving higher over the last few months. For one, there simply isn’t enough “buying power” to do so, given that the average account size for these participants is quite small. In addition, retail investors as a whole are not buying stocks that actually move the large indices such as Apple, Amazon, Microsoft, etc. It is these types of stocks, those with the highest weightings in the large indices, that actually have an impact on what direction stocks trade as a whole.

Overall, the trend in stocks remains up, and that leaves very little to complain about as of right now. While Thursday and Friday of last week could be a warning sign, until we see further selling, we remain in a wait-and-see mindset. If the price levels listed above are broken to the downside, the risk of further market deterioration increases, and protective measures to accounts would be implemented. Meanwhile, rotation underneath the surface continues, as even the Dow Jones Industrial Average has shown a bit of outperformance recently. As always, we urge you to ignore any extraordinary headlines you may see, giving reasons as to why stocks go up or down. While many will tell you large institutions – who are typically buying for intermediate- and long-term holding periods – are not participating, the weight of the evidence would suggest otherwise.

As always, we continue to monitor accounts and adapt to different market conditions in a year that continues to break records for volatility.


Ian McMillan, CMT
Market Technician


David Zarling, CMT
Partner, Head of Investment Strategy and Research

P.S. If you would like more insight as to our thoughts and viewpoints on the market, including specific insight into client portfolios, please remember to subscribe to our podcast “The Weekly Trend” on your favorite streaming platform!

Client First Investment Management LLC is a Registered Investment Advisor

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Client First Investment Management LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Client First Investment Management LLC​ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.