Treasury Secretary Alexander Hamilton created the first American Stock Exchange in 1792 at a coffee house on the corner of Wall and Broad in Manhattan. It was dominated by Banks and Insurance companies and certainly low tech. Increasingly our modern stock exchange propagates an ever evolving technology sector worth trillions with its tentacles in every aspect of business. As the recent 50%+ four month tech group rally attests, this remains a vibrant Bull market backed by the full faith and credit of Government and its digital printing press. However, short term, tech companies have stalled into earnings as investor expectations become harder to beat. After such a heart pounding 4 month uptrend without a serious correction, many examine the tea leaves of even the hourly price trends to look for volatility and cracks in this charging Bull. One of our technical clues of short term turbulence in tech, represented by the Nasdaq (QQQ), can be seen here as our 3 Steps and a Stumble Rule was triggered today. If we can’t regain this breakdown level at 10,800, then a downtrend can continue with a low due over the next few weeks. With massive fiscal stimulus coming by early August, we would expect modest corrections and any move back above this congestion breakdown would signal a brief continuation move to new all time highs in the SP 500 Index over 3400.
On the normal Daily perspective this year, the V shaped recovery in stocks led by the Tech laden Nasdaq is in tact, even if prices fall 10% from the recent peak. The pattern of collapse in the Q4 correction of 2018 and V shaped recovery for 19 weeks in 2019 shares some behavioral similarity with today’s 18 week V shaped assault on record highs. In both cases there was a panic atmosphere going into a free-fall climax low followed by relentless rallies that could not manifest a notable correction until 4 months into the uptrend. Late July would be that 4 month parallel today.
Our primary overbought/oversold trading indicators (below) remain polarized with option sentiment moving back to record levels of optimism, while other indicators reflect continued disbelief or outright pessimism regarding this record rally. The Call option buying is understandable as traders buy more Bullish Calls relative to Bearish Puts as the market rallies. Historically it’s difficult for stock indices to continue running to new highs with option sentiment at this extreme. The extreme Bullish sentiment in January required a 2nd extreme a month later that may be occurring again as a double top in July. However, investor skepticism (light blue line) has a great track record of indicating a medium term low within a couple weeks of the current oddly oversold levels we are seeing today. The broad indices have already been moving sideways for 6 weeks and we favor more price congestion ahead. A stock market pullback should be mild, but with new stimulus and political conventions in August kicking off a season of major policy uncertainty, a continued choppy atmosphere through the November 3rd election is logical.