Tug of War Continues
In the short term, the large topping pattern continues to form. The top will be confirmed if/when the major averages break below support of their large bases. The tale of two tapes continues to unfold as the S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) continue to outperform the Nasdaq composite (COMP) and Russell 2000 (RUT). As previously mentioned, the Nasdaq and Russell are forming Head & Shoulders topping patterns and the DJIA and SPX are forming large flat bases. On Monday and Tuesday, the DJIA and SPX briefly broke out and hit new highs but sellers quickly showed up and negated the breakout. Then later in the week, the RUT sliced below the neckline of its large H&S top but buyers showed up and defended support (for now) and helped it trade above that level by Friday’s close. The market is in a tug of war right now between the buyers and the sellers. Eventually, one side will win but more time is needed before either side emerges victorious.
Mon-Wed: Head Fake?
Stocks opened higher on Monday sending the S&P 500 (SPX) and Dow Jones Industrial Average (DJIA) to fresh record highs. In a somewhat negative divergence the Nasdaq and Russell 2000 continued to lag and closed below their respective 50 DMA lines (not a healthy sign). Stocks opened higher on Tuesday but closed near their lows as buyers ran out of steam. The SPX and DJIA “breakout” was very obvious and as we have said many times in the past- markets are counter-intuitive in nature and obvious rarely works on Wall Street.
The “breakout” was short-lived as the SPX and DJIA both negated their breakouts and fell back into their prior bases. Meanwhile, the Nasdaq composite and Russell 2000 traced out a bearish series of “lower highs and lower lows” which is not a healthy event. April Retail Sales missed estimates which suggests the consumer is still recovering. Economic data was light as April PPI rose 0.6%, beating estimates.
Thurs-Fri: Sell in May Continues
Stocks opened lower on Thursday sending the SPX back down to its 50 DMA line and the small-cap Russell 2000 index down to a fresh low for the year. The Russell is now officially in correction territory(defined by a decline of 10-19.9% below a recent high). Billionaire Hedge Fund Manager, David Tepper, sparked caution after comments from the SALT conference in Vegas. Taper said it is time to be nervous right now which is a major shift from his outright bullish stance over the past 5 years. Economic data was mixed, consumer prices ticked up +0.3% which was the highest reading in 10 months and matched estimates. Industrial production fell 0.6% in April, missing estimates for a gain of 0.2%. Adding to negative news, home builder sentiment weakened slightly in May to 45, according to the monthly index from the National Association of Home Builders. On a more positive note, weekly jobless claims slid by 24k to a seasonally adjusted 297k according to the Labor Department. That was the lowest reading since May 2007 and brought claims back to their pre-recession level. The Street was looking for a reading of 320k. Stocks edged higher on Friday as the sellers ran out of steam- at least for now.
Market Outlook: AGING BULL
Stepping back the market is building a new topping pattern/base up here as investors digest last year’s strong rally. Remember, the bull market turned 5 in March 2014 and the last two major bull markets topped out after turning 5 (1994-March 2000 & Oct 2002-Oct 2007). Clearly, this bull is aging which means the easy money from this cycle is probably behind us and it will get a lot trickier as we move forward. If the top is confirmed a new leg lower will likely follow. Until then, patience is king. As always, keep your losses small and never argue with the tape.