/ June 16 / Weekly Preview
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Monday:
NY Empire State Manufacturing Index (-5.5 exp.)
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Tuesday:
Retail Sales Ex Autos MoM (0.1% exp.)
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Wednesday:
Fed Interest Rate Decision (no change expected)
FOMC Economic Projections
Initial Jobless Claims (245K exp.)
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Thursday:
Market Closed
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Friday:
N/A -
Monday:
Lennar Corporation
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Tuesday:N/A
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Wednesday:
Smith & Wesson Brands, Inc.
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Thursday:
N/A
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Friday:
Accenture plc
Kroger Company (The)
Darden Restaurants, Inc.
CarMax Inc
The Bull Market Continues
The market’s bullish trend continues this week, as major stock market indices aim for fresh all-time-highs. An Israeli strike on Iran early Friday morning sent stocks tumbling at the open, but markets seem to be recovering well at the moment. No matter the pretext, a correction or consolidation process is needed to work off some short-term overbought conditions. As seen on Friday, these pullbacks are almost immediately bought.
This behavior suggests that a median correction (-4% to -1.8%) may be hard to come by in the next period, as bulls remain firmly in control. While technically there is more downside risk than upside (a 50-DMA retracement would imply a-5.3% loss for SPY), momentum is a powerful short term force.
As such, while support stands at $574 (200-DMA and S1), the odds are higher that the market reaches all-time-highs first. Then, resistance stands at $622.
With some patience and willingness to sacrifice some short-term performance, patient investors will get an opportunity where the risk/reward proposition improves markedly. Our sentiment indicator barely got out of the “SELL ZONE” with the drop on Friday, but sits very close to the high end of the range, nonetheless.
The psychological weight of “missing out” on a bull rally that won’t seemingly stop is hard to fight in the short term, especially for those investors which have sold the April bottom and didn’t “get back in”.
The most interesting class of such investors are certain large institutions and hedge funds which have sold into rising prices recently, as the market recovered. Our own Dark Pools data shows that during the last month, large traders have been neutral at best toward large S&P 500 constituents. Around half of the key stocks, including tech heavyweights Microsoft, Google and Apple, have seen their shares distributed rather than accumulated.
Our analysis is confirmed by Deutsche Bank, which puts professional investor’s exposure at around the middle of the recent range. This is bullish for equities because large traders are expected to step in and buy any significant dip. Eventually, they do need to re-risk portfolios and support the current rally into July.
Risk parity models, which distribute risk evenly across asset classes rather than allocating capital based on market value or equal dollar amounts, are significantly underweight equities at present. These strategies aim to balance risk contributions from each asset, regardless of expected returns or market size, in order to maintain a diversified portfolio.
However, they are currently “on the wrong side of the trade” and at a disadvantage due to underperformance risk. If the market rally persists, these models are likely to increase equity allocations, further fueling the upward momentum (similar dynamics to a gamma squeeze).
So… will the bull rally ever end?
Of course it will, but it’s a fool’s errand to try an pinpoint the exact turning point. However, there are several indicators we are watching:
Sentiment - offering a contrarian signal at extremes (when investors are overly bullish — e.g., excessive buying, high confidence — it may indicate a market peak, as most buyers are already invested, leaving little room for further gains; conversely, extreme bearishness —e.g., panic selling, widespread headline fear — often marks market lows, as selling pressure may be exhausted, creating rebound opportunities;
GEX - dealer Gamma Exposure for SPY has turned positive on April 24 and has remained positive since then; in a positive gamma regime, market makers are acting as volatility suppressors, as they are looking to buy assets on the dip; lower volatility tends to foster higher prices all things being equal;
Dark Pools Buying - but this time taken as a contrarian indicator; when institutions finally “cave” and “buy into” the rally, it’s likely that there will be no other marginal buyer to push prices higher;
Market Breadth - especially at the 200-DMA level; we’re looking for a healthy amount of stocks to trade above the 500/1000 mark. but not exceed 700/1000 which would align with euphoric conditions;
Our Trading Strategy
In conclusion, the bull rally remains intact, and as shown by the technical and sentiment gauges, we do not yet have the conditions for a “mean-reverting” event. Until bullish sentiment and positioning become more extreme, there is no reason to become bearish or neutral towards this market. We have already increased equity allocations to levels we are comfortable with (see the Sigma Portfolio) and we may use pullbacks to further add equities to the mix.
On a longer-term basis, the recent correction also provides sufficient runway for the bull market to continue well into next year.
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I am not a financial advisor licensed in the United States. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject to change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this blog post.
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