The major stock indexes have enjoyed an impressive rally in the face of overwhelming pessimism and what some deem to be an antagonistic fundamental backdrop. The rally has primarily been made possible by the unwinding of a historically large net short futures position in the E-mini S&P 500 futures. However, a weaker dollar, better-than-expected earnings, and momentum traders chasing hot tech stocks higher have contributed to the move.
It should be noted that most index gains are on the back of a handful of stocks, while the majority of tickers have been left behind. Eventually, we believe the underperforming names will catch up to the highflyers such as Nvidia (NVDA) , pushing the S&P 500 even higher than it is today. But for now, as we move into late summer and early fall, the odds favor a market correction.
Our friends at MRCI have run the stats and data over the last 15 years, suggesting the September E-mini S&P 500 futures contract has shifted into correction mode on, or about, July 22. Most years, this is simply a pause before staging a year-end rally, yet, those that follow markets know some of the biggest corrections occur between the summer and Santa Claus rallies.
Chart Source: MRCI
We've been bearish on the U.S. dollar for almost a year. We believe the ultimate destination for the greenback is 90.00 to 95.00 (based on the dollar index futures contract). At the same time, we recognize the significance of 99.00 support and the high probability of a rally from this level.
Thus far, we've seen some buyers show up to defend the trendline. If they succeed, as expected, a return to 103.00 or 104.00 is probable. The higher dollar would likely weigh on risk assets such as the stock indexes and crude oil.
Chart Source: QST
CNN publishes a Fear & Greed index based on seven factors, including market momentum, the ratio of puts to calls, stock market breadth, safe haven demand, and others.
The index has been firing off an "Extreme Greed" rating on most days since early June. This is a sign of complacency or, worse, reckless regard for risk.
We would never suggest anyone take action based on the CNN Fear & Greed index, but it is a red flag warning of a potential correction, and we have taken notice.
Chart Source: CNN
Earlier this year, we put out chart analysis suggesting the S&P could eventually see a little over 5000 (it was not a popular opinion). We haven't forgotten that, nor have we changed our long-term view. However, it is important to remember that long-term analysis can be thrown off track by news or events that are simply unpredictable; further, circumstances are fluid.
Chart Source: QST
The E-mini S&P 500 has habitually bounced off an uptrend resistance line and current market valuations are testing the limits of that line. The jury is still out on whether the market can muster enough buyers to keep prices afloat despite technical resistance and overheated RSI readings on a daily and weekly chart. Still, the odds are the indexes will succumb to the law of averages. Accordingly, we see the risk of a correction toward the 4200 area, or deeper if something catches the market by surprise.
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