Special Bulletin: June 23, 2020

Storm Clouds Brewing?

As summer sets in and the nights get longer, the weather can turn nasty on a dime. Folks who live in tornado alley, or on the east and gulf coasts during hurricane season, can attest to that annual fact. Investors who depend on Wall Street can often relate to late summer “storms of selling” too.

While the market’s remarkable rebound has continued, not every asset class is seeing blue skies.

There is a developing negative divergence between the Nasdaq and the S&P500 indexes on their charts. While the Nasdaq has billowed ahead like a thunderhead into new highs, the S&P500 has stopped short of its own prior peak thereby creating the divergence.

In addition, the S&P500’s chart formation is creating what we define as a “sub-peak.” Put plainly: a failure to pass above a recent price high within 10-15 trading days. To negate this “sub-peak” pattern the S&P500 needs to punch above its June 8th high and stay there. To remove the negative divergence with the Nasdaq it will have to better its Feb 19th all-time high. Beware. The longer it stays under those prior high price levels the more likely a summer “selling storm” may be brewing on the horizon.

Our Current Market Outlook remains “Market in an Uptrend” with a “green” light. Three of our Core Four indicators are green, while one is RED (see Core Four above). The net green condition is hanging on by a thread. Another day or two of professional selling (Distribution), or a high volume down day that slices through the indexes rising 21 day moving averages will cause a change in the Core 4 to a yellow (caution) condition.

The market remains overheated (sentiment) and extended in price. A few internals, such as recent lagging advance-decline numbers and massive call buying, appear to be saying “it’s time to look for an umbrella.” While a pullback to the 21 day moving averages of the main indexes is very likely, the possibility of an even sharper decline to the 50 day moving averages is increasing.

What can an investor do now? While the trend is still up, be aware of investor complacency and excessive levels of optimism. Don’t vacation from focusing on your investments. Raise stops and harvest profits in certain positions. Limit new buys. Pray for wisdom and consider stormy days as a buying opportunity.

Have a Triumphant day! ®