What’s Next For The Roller Coaster Stock Market?

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The stock market was like an amusement park ride last week, down over 1% the first two days, up 0.93% Wednesday, down 0.92% Thursday, and then 1.11% higher on Friday. With all the choppiness over the last week, the major averages showed little change. Rumors about President Biden’s proposed doubling of the marginal rate on capital gains triggered the heavy selling on Thursday.

The S&P 500 gapped a bit higher on Friday, as Thursday’s action was quickly forgotten, and ended the day with a bit of late selling. The S&P 500 still closed the week at 4180.2, well above Monday’s low of 4114.8, but was down 0.1% for the week, just 0.11% below the record close.

The Dow Jones Transportation Average led the markets as it gained 1.4%, significantly better than the 0.5% gain in the iShares Russell 2000. The growth-oriented Nasdaq 100 Index was down 0.7%, a bit weaker than the Dow Jones Utility Average and the Dow Jones Industrials. The SPDR Gold Shares (GLD) GLD was unchanged.

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There was enough economic data to offset any concerns over potentially higher tax rates. On Thursday, The Conference Board released their Leading Economic Indicators (LEI) for March, which were up 1.3% after February’s reading was revised downward. Senior Director of Economic Research Ataman Ozyildirim commented that “the improvement in the U.S. LEI, with all ten components contributing positively, suggests economic momentum is increasing in the near term.”

The Chicago Fed National Activity Index came in at 1.71 while economists expected a decline of 0.66. In addition, jobless claims came in lower than expected on Thursday, and on Friday, the sales of New Single Family homes surged to 1.02 million, surpassing the 888,000 that economists were looking for. The excellent chart from AdvisorPerspectives shows that this was the highest reading since 2006.

A few weeks ago, such strong economic news might have stoked fears of inflation and moved interest rates higher. Last week, however, that was not the case. The yield on the 10-Year T-Note declined last week ,and the chart shows that the short-term downtrend is still intact. The next support is at 1.495% (line a) with additional support now at 1.404% (line b).

The T-Note’s daily Moving Average Convergence-Divergence (MACD) turned negative on March 23 (point c) as the MACD-Histogram dropped below the zero line. The weekly MACD lines are still positive, but they have declined further and, if yields continue to decline, they could go negative in the coming weeks. It is still my view that inflation fears are likely to resurface in the coming weeks.

As most are aware, commodity prices have risen sharply in the last year. The Reuters/Jefferies CRB Index (RJ/CRB), a which tracks a basket of commodities on the global market, is up almost 100% from the March 2020 low of 101.48.

The chart suggests that since 2001, there has not been a clear correlation between the RJ/CRB and the S&P 500. The CRB rose along with stocks (line a) from 2002 through 2007. Both declined sharply during the bear market. The CRB rose along with the S&P 500 from 2009 to 2011 but then the CRB drifted lower as stocks continued to move higher.

The CRB dropped sharply from 2014 through 2017 (box b), while the S&P 500 consolidated. From 2017 to early 2020, the CRB was range bound, while the S&P 500 continued its strong uptrend. Both plunged in February and March of 2020, which shows that a sharply declining CRB is generally a negative for the S&P 500.

While many investors think that inflation is negative for stock prices, a recent article by Mark Hulbert casts doubt on this common perspective. However, as Hulbert notes, inflationary fears may cause a correction, which could be a good buying opportunity.

After last week’s choppy trading, what is next for the stock market? Though there are a number of signs that the stock market is overextended, the recent 2.4% decline in the Invesco IVZ QQQ Trust helped relieve some of the overbought concerns. The percentage of Nasdaq 100 stocks above their 10-day moving average dropped from 92% in early April to 43% last week.

The daily chart of the QQQ reveals a nine-point (2.4%) trading range over the past two weeks. A strong close above $343.03 (line a) has initial projections in the $350-$352 area. The 20-day exponential moving average (EMA) at $333 has not been tested since late March and is now first good support.

The Nasdaq 100 Advance/Decline line has been positive and above its weighted moving average (WMA) since March 25. It turned upward late last week, with daily support at the uptrend (line b). The daily On Balance Volume (OBV) moved back above its WMA on Friday and shows a positive trend. Overall, volume has been low over the past month, but a close in the OBV above the resistance (line c) would be bullish.

What will be favored on the next rally: growth or value? The ratio of the iShares Russell 1000 Growth (IWF) IWF to the iShares Russell 1000 Value (IWD) IWD shows which sector is leading the other. When it goes upward, growth is leading, and when it goes downward, value is leading. The weekly chart of the ratio still suggests a top is forming, favoring value, but the daily chart above shows that the ratio is still rebounding from the March lows, which currently favors growth.

The near-term downtrend (line b) is in the 1.72 area, with further resistance above 1.78. The daily MACD lines are still positive, but the ratio likely needs a rally this week to keep the momentum positive. It would likely take a move above the November high at 1.873 to indicate that a major top was not in place. 

The positive action by some growth-focused ETFs supports this view, despite the fact that there are no signs of a top yet in the value ETFs. Currently, 85% of the S&P 500 stocks are above their 50-day moving averages and over 50% of investors are bullish. Because of this, I would not be a heavy new buyer right now of either stocks or ETFs, though there are a number in both categories that look attractive.

In the Viper ETF Report and Viper Hot Stocks Report, I update subscribers with my market analysis at least twice each week and provide specific buy and sell advice. I follow both growth and value ETFs. Each report is just $34.95 per month. New subscribers also receive six free trading lessons, a $49 value.