Will Stocks Next Move 20% Higher Or Lower?
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In the past few weeks some Wall Street strategists have lowered their year -end targets for the S&P 500. Over the weekend one Bloomberg survey reported “4% of the MLIV readers reckon the S&P 500 has found a bottom for the year based on closing levels”.

As I have pointed out recently the bullish % from the American Association of Individual Investors (AAII) on April 13th was 15.8% which was the lowest reading since 1993. The other measures of sentiment like the recent data from the monthly Bank of America (BofA) survey of large money managers indicates that they now hold more cash than at any time since September 2001. The Bank of America described the results as “extremely bearish.”

Their top concern is that the central banks will raise rates too much and then precipitate a global recession. Stagflation fears are also rising as the bearishness is extreme enough to “trigger BofA’s own buy signal, a contrarian indicator for detecting entry points”.

That did not stem the selling last week as the Dow Jones Transportation Average recorded the largest drop-down 6.7% over 2% more than the Nasdaq 100 Index (NDX) decline of 4.5%. On a year-to-date basis, $NDX has been the weakest down 27.5%.

The S&P 500 Index ($SPX) was down 3.1% last week which was a bit more than the 2.9% decline in the Dow Jones Industrial Average. After a four-week decline, the SPDR Gold Shares (GLD

GLD
) was up 1.9% last week and is now barely higher for the year. The Dow Jones Utility Average was down 1.9% last week but is still up 1% YTD.

The S&P 500 had the fifth lower consecutive weekly close as the monthly S2 pivot support at 3814.05 was reached Friday before it closed the day higher. The sharply declining 20 day EMA is at 4079.99 and it would take 5-7 days for it to turn higher. The May pivot is at 4283.22 but will be lower in June since it will be based on May’s high, low and close. The high from last Tuesday at 4090.72 is now initial resistance.

From the March 29th high at 4631 to Friday’s close of 3819, the S&P 500 has so far declined 21.7%. The last series of five consecutive lower closes in the S&P occurred in February and March of 2001. The January 31st, 2001 high of 1373.73 to the low on March 22nd at 1081.19 the S&P 500 dropped 27.9%.

In early April 2001, the S&P 500 made a new closing but not an intra-day low before it turned higher. The close above the March 27, 2001 high at 1183.25 (point a) was a sign that a bottom was in place. The rally from the 1081.19 low to the rally peak on May 22nd at 1316 was a gain of 21.7%. The monthly R1 pivot resistance at 1315.18 was slightly exceeded before the rebound was over. The March lows were not violated until the following September.

The weekly chart of the Invesco QQQ

QQQ
Trust (QQQ) closed near the week’s lows and below the 50% support at $286.56. The low of $280.21 which was just below what is often referred to as the equality target. It is derived from the decline from the November high (point A) to the March low (point B). If the decline from the high at point C is equal to the decline from A to B then the target would be at $280.57. The weekly starc- band was exceeded last week and has declined to $270.20 for this week.

The Nasdaq 100 A/D line declined last week and has dropped further below the March low. There is next support from 2021 at line b. The weekly A/D line needs to move above its WMA and the downtrend, line b, to turn positive. The daily A/D line (not shown) is below its WMA and negative.

The yield on the 10 Year T-Note closed down 5% last week at 2.787%. The high in yields two weeks ago was 3.167% and I continue to think rates have topped out for now as the close on Friday was below the support at line a. The next chart support is at 2.503%, line b, with stronger at 2.309% (line c).

The MACDs diverged from yields as they were hitting their high, line d, which was a sign that the momentum was lower as yields moved higher. Similar bullish divergences were evident in some bond funds. There are no signs of a bottom for the 10 Year T-Note yield and declining yields should be supportive for stocks.

Though the daily outlook for the stocks market is still negative that could change with a couple of strong days that are consistent with the number of selling climaxes we have seen recently. From the combination of sentiment and technical readings I think a 20% rally from the lows is likely and could be similar to what occurred in 2001. There is plenty of economic data this week including the FOMC minutes, the latest reading on GDP as well as the month end reading on Consumer Sentiment.

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