How Low Can The Bullish Sentiment Go?

The stock market was locked in a narrow range last week as the rally attempts were met with selling. The reaction to a slightly hotter-than-expected CPI report on Thursday was positive but did not last long as concerns grew over the implications of changing global interest rate policies.

It appeared that the ECB’s comments about last week’s rate hike caught the market by surprise. The ECB sent a message that its rate hikes were probably at an end based on weaker economic growth that argued against further hikes. The ECB said that “key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

US yields opened higher Friday and all yield maturities finished the week higher. This helped to pressure stocks on Friday led by a 1.75% decline in the Invesco QQQ
QQQ
Trust (QQQ) while the Spyder Trust (SPY
PY

SPY
) was down 1.2%.

Since stocks were higher early in the week the changes do not seem to be that dramatic but the momentum shift appears to be more significant. The Nasdaq 100 was only 0.5% lower while the S&P 500 and iShares Russell 2000 both dropped 0.2%.

The Dow Jones Utility Average was the week’s winner up 2.3% followed by a 0.9% gain in the Dow Jones Transportation Average. The SPDR Gold Shares and the Dow Jones Industrial Average were both a bit higher.

For the week the NYSE A/D numbers were just barely positive with 1569 Advancing issues and 1467 Declining. The daily reversal in the A/D numbers was more dramatic. On Thursday the A/D ratio was 3.64 to one positive but on Friday was 2 to 1 negative almost offsetting all of Thursday’s gains. As a result, the daily A/D lines reversed from positive to negative.

The weekly chart of the Spyder Trust (SPY) reveals a lower close for both of the past two weeks. The still-rising 20-week EMA is at $436.48 with additional support in the $430.91 area and the 3^rd QPivot. The support going back to the October 2022 low, line b, is at $419.73. The three-week high is at $453.67.

The S&P 500 A/D line was slightly lower last week and is holding just above its gradually rising WMA. The major support still stands at line c, and the move above this level in June projected new all-time highs for SPY. The weekly on-balance-volume (OBV) closed last week below its WMA. The OBV completed a bottom earlier in the year by overcoming major resistance at line d. The volume increased last week so watch for signs of heavier selling.

The Invesco QQQ Trust’s weak close on Friday may be more significant as the close was below the 20-day EMA at $372.97 and the pivot at $372.09. The daily starc- band is at $364.27. There is a band of more important support from the August low at $358.28 and $54.71. A move above short-term resistance at $378.27 and Thursday’s high is needed to reverse Friday’s action.

The Nasdaq 100 A/D reversed to the upside on Thursday which was a good sign but it needed another up day to confirm which we did not get. The A/D line closed below its WMA and is well above the strong support at line c. The daily RS has also turned negative and may be ready to test the former downtrend. The weekly RS and A/D are declining but still positive.

As expected given the technical readings last week the dollar and crude oil were higher last week. Both are close to key resistance and the weekly starc+ bands so we may see a pullback in the next few weeks.

The multiple time frame DTS analysis still looks the strongest on the energy sector at 91.7%, followed by 66.7% in the XLC
XLC
and then 58% readings from XLF
XLF
and XLU
XLU
. These two ETFs need to hold above the price lows from the past three weeks to maintain their improving trend.

The % for XLK
XLK
has fallen from 75% last week to 58.3% this week. There were 4 new DTS sell signals on Friday which included CRM, INTU, MSFT, and AMD. New 3_DTS sell signals this week will warn of a further decline. ( I will share more grid analysis during the week)

On the sentiment front, the recent stock market warnings from the market bears about sticky inflation, weak earnings, and recession fears appear to be working. According to the survey from the American Association of Individual Investors (AAII), the bullish % has dropped to 34.3% from 42.2% a week ago. Now over 65% are either neutral or negative on the outlook for stocks in the next six months. I would expect the bullish % to decline further and reach low enough levels in the mid-20s to complete the correction.

For SPY there is more important support and potential downside targets of a further correction in the $436 and then in the $428 to $430 area. The QQQ looks vulnerable down to the $362-$364 area with more important support in the $358 area.

No change in rates is expected this week from the FOMC but we also get Consumer Confidence, Leading Indicators along with three monthly reports on home building. I will be updating the A/D analysis during the week.