Stocks Breakout as Seasonal Top Approaches

On August 12th, 2 trading days before the most recent 3% selloff, we alerted traders to expect a 3 day decline of 3 to 6% starting the 16th and no later than the 18th. We don’t always get this precise, but the technical overbought conditions required an immediate pressure release for short term traders to liquidate. As can be seen by the chart below, quoted from our updates and newsletter, the top did occur on the 16th and led to a 3 day, 3% correction. Such a decline was not enough to warrant longer term investors subtracting or adding to their Bullishly postured portfolios. While we await indications of the next short term peak, our seasonal pattern allows for this rally to continue higher into early September before another congestion period begins. The larger seasonal pattern favors maximum downside pressure culminating in late September to early October during one of the weakest periods of the year. If there is a broad market correction of 5% or greater by late October, then the pattern would favor more record price levels before year end.

Short term chart pattern favors more upside follow through from Friday’s Bullish response to Fed Chief Jerome Powell’s comments. Technically once investors can clearly identify a market trendline on a 3rd test, the 4th test of that resistance line often is exceeded with a decisive breakout. On August 30th the SP resistance line is at 4513 rising about 7 points a day.  Such a breakout may cause a new overbought reading in the first half of September.

Stocks catapulted higher in 2020 far ahead of earnings due to the emergency Depression level stimulus being added to the economy. This caused trailing Price to Earnings ratios to rise from 20 to 40 by year end. This year has been the year of profit realization on the back of vaccine induced economic reopening progress. In recent months earnings have been rising faster than stock prices causing valuations to actually come down modestly. While most metrics of stock market valuations are high historically, given the extremely low interest rates and extraordinary stimulus that is in the system with more pending, exceptions can be made for maintaining these historic values until Fiscal and Monetary punch bowls begin evaporating perhaps in late 2021 to early 2022. 



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