Today we’ve got part two of my three-part video series for the week.
And we’re diving deeper into what’s wrong with the markets in my view… including why I would buy the unemployment rate if I could (hint: it’s headed up…)
As well as some sectors I’m keeping an eye on for shorting in the medium- to long-term.
Check out my video below, or scroll down to read the transcript.
Transcript
Hey, good morning, folks. This is Jeff Clark.
This is the unemployment rate, and I wrote this up in, I think it was in Market Minute a couple of weeks ago, and I showed the unemployment rate, and I said if this was a stock I’d be looking to buy it.
This is a monthly chart of the unemployment rate, and you can see, it’s curling up from off the bottom there in 2023.
And now we’re up here, and it looks like we’re accelerating higher. And the last two times that happened similarly to when we started interest rate easing cycles for the Fed was back in 2002, 2007.
So here we are again in a very similar situation, and it looks to me like the unemployment rate is ready to move higher. And who knows? Maybe that’s what the Fed is looking at. And the Fed is looking at potentially getting out in front of us and trying to lower interest rates ahead of that.
Anyway, I’m talking very fast. We could talk, you know, for hours and hours and hours, a whole entire class on this. But that’s not the purpose of what we’re trying to do.
Here, let’s look at the stock market. So here is the S&P 500.
So this chart, if I’m looking just at this chart. This is a daily chart of the S&P 500. This looks really quite bullish to me. This looks like an ascending triangle pattern where here we were in July we hit an all-time high, came down, corrected, had a pretty good sell off into August, all the way back up to highs, came down, corrected again, made a higherlow.
And now we’re bumping into resistance again. Maybe we come back down one more time inside this little triangle pattern to test the support line.
I would be a buyer if it does that in the very short term, because I do think we take off and we move higher out of this, and I think it might be some of the enthusiasm around the interest rate cut that causes that.
What I’m looking for on the upside now – I’m talking out of both sides of my mouth here because I’m saying short-term, I think we go higher – but medium-term, I think we’re in a little bit of trouble because of what happened in 2007. Let me show you that.
So we go down to this chart.
This is 2007, and notice the similarities here. If we look at mid-July of 2007, the stock market was at all-time highs. The S&P 500 was at all-time highs.
We got a pretty steep decline going into August, very similar to what we saw this year, and then we had a nice rally back up.
Now, what’s a little bit different is in mid-September of 2007, the S&P 500was sitting right on its 50-day moving average line as the Fed decided to lower interest rates by 50 basis points.
And that’s what caused this giant spike right here. This was a really big spike on the day the Fed announced dropping interest rates, and then we continued higher, so that helped propel the market higher for about three three-and-a-half weeks, and you can see how we made a marginal new high in early October of 2007.
At that point, early October 2007. The reason I drew this little line here is to measure the distance above the 50-day moving average where the S&P hit. This was about 5.4% above the 50-day moving average.
Now, if we go back to the previous chart, the current situation and we look at something similar happening here. The 50-day moving average is this squiggly blue line at the bottom here, if we add 5.5% to that we get pretty close to 5800. All-time high, so far is 5669, so 5800 would be a marginal new high.
That would be very similar to what we saw back in 2007, and it would also play out this pattern, it would play out this ascending triangle pattern, which kind of argues for another slight, new high.
And I think at that point we would probably have the conditions in place for either an intermediate- or a long-term top in the stock market. So that’s what I’m looking for.
Any short-term weakness this week, I think it’s bought into, and I think ultimately, we make a higher high on the S&P 500.
So short-term bullish, medium-term, longer term, not so much for the reasons that we’ve already discussed here.
Alright. So let’s scroll down a little bit further.
We’ll get rid of 2007. That’s a bad memory for a lot of folks. Oh, but just to make a quick note here, you’ll notice the low in August of 2007, and then we rallied to a new all-time high, and then we came all the way back down to retest that low in 2007.
If we see something similar happen this time, I’ll go back up to this chart, something similar this time. So we’ve got this high in July dropped all the way down to 5200 in August, rally to a new high. We break out to another new high here, and then come back and correct.
I would look for this 5200 level to get tested again sometime in the weeks ahead. So that’s why, if we make a marginal new high something above 5700 or so. I’m going to be looking to short the S&P 500, and looking to short, some of the extended sectors, simply because I do think that in the weeks ahead we will come back down and we will test this 5200 level again.
Longer term, I’m even more bearish, but for the short-term next few days bullish, medium-term bearish, long-termbearish.
All right. Going on further, we’ll do more with the short-term here. Let’s look at a couple of the daily indicators that set things up here. So this is the McClellan Oscillators for the New York Stock Exchange and for the Nasdaq.
We look at this all the time as well. So we’ve got this pattern against the Bollinger bands and against the absolute level of 60 and minus 60. So right now the McClellan Oscillator for the New York Stock Exchange is sitting just below 40.
The Nasdaq oscillator is sitting just below 30, so we’re overbought, but we’re not in an extremely overbought condition. So there’s some room in the very short-term for this to move a little bit higher.
And that’s why I think again, based on what we think is going to happen with the Fed this week, I think there’s probably going to be some strength that there’s some short-term weakness in the next or today or tomorrow.
I think it could be bought into, because ultimately, I think these indicators will probably have to get up to either their upper Bollinger bands or to the absolute 60 level to get to an extremely overbought condition and give us a really good setup for some short-term short sales.
But in the meantime, there’s still room for them to work higher. So I don’t want to be too quick to adding shorts in this particular environment.
And we’ll look at the summation indexes as well.
These are more intermediate term indicators of market strength and weakness. And right now we’re on a buy signal for both of them. That’s what these blue lines are. This is when the oscillators cross above their 9-day exponential moving average.
What I want you to note here, and the interesting thing, when you analyze these is if you look at the distance between, say, for example, in August of 2023 we had this sell signal and that sell signal lasted for a few months, so we got a buy signal.
Then in early 2024, we get another sell signal, which lasted about 6 weeks. Then in April we got another sell signal, which lasted about 5 weeks, then in June, another one 5 weeks.
And all of a sudden these sell signals are being played out within just a matter of a week or two in August, very short term, in September very short term. So they’re getting quicker and closer and closer together, not exactly sure how to interpret that, but it seems to me that when you get these folks rushing in to buy, there’s a little bit too much optimism.
So I think what happens is the buy signals will also tend to be shorter term. So I’m looking for this particular buy signal that these are both on, since they turned higher and are above their 9-day exponential moving averages.
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You know, we might get a few more days of strength out of that. That coincides with what we just saw with the McClellan oscillators and with the current bullish setup on the S&P 500. So again, I can see where the market moves higher in the very short term, warning signs going off intermediate-term, but in the short-term I can still make an argument that stocks are ready to go a little bit higher.
As we get through all of this, though, I’m expecting to use any movement to new highs as an opportunity to start adding short exposure. So I mentioned in Delta Direct the other day that we ought to start putting a list together of stocks and sectors that we think are shortable.
Among that would obviously be the sectors that have been the most extended. So you look for the most overbought conditions, and that’s going to be the stocks that have done the best, because when the selling starts portfolio managers don’t tend to sell the losers out of their portfolio. When the selling starts they tend to sell the winners out of their portfolio. They book those profits the winners by a large degree.
Right now, not just technology, that seems like an obvious, but consumer staples which in this index is a Procter and Gamble. These are things that are necessary. So Procter & Gamble, Costco, Walmart. All of them have been fantastic performers. But if you look at the charts, the individual charts on those particular stocks, and you look at the sector chart, you can see how it’s making new highs.
But the moving averages are now quite extended from each other. So that’s going to make it more difficult to add even more to that. And then you’re also starting to see some negative divergence creep in on some of these daily indicators.
So to me, that’s a warning sign. I’m not shorting them right now, but on continued strength. This is one sector that I’m targeting as a possible short sale candidate.
Let’s go on down to the next one. This is real estate, mostly real estate investment trust, home builders or sorts of things. Same situation.
You have almost a parabolic looking move going on here as folks are anticipating lower interest rates. So they’re buying interest rate-sensitive, like real estate.
You’ve got an extended condition. You’ve got moving averages that are extended far away from each other. You don’t really have negative divergence here. So you know, maybe dodge a bullet on this particular one. But again, this is a sector that I would target as a potential for selling short when the opportunity comes to be able to do that, where it makes sense to do that.
All right. Another sector. Gosh! One of these days I’m going to figure out how to do this, so I don’t collapse my screen at the same time. Home builders. This is probably my favorite sector to short, because from a valuation standpoint.
Home builders are trading at a historically high relative valuation to what they typically do. I think the price earnings ratio is about double what it normally is, the book value is about double what it normally is. So this, I think, is a relatively expensive sector. It’s made a new high.
So you are shorting into strength, which is, you know, there’s pluses and minuses to doing that. But you can see as it’s made a new high, all of these technical indicators at the bottom of the momentum indicators are showing negative divergence.
That tells me that this is maybe about to turn, and I think that might coincide again with another new high in the market.
We might take a look at adding some short exposure to the home building sector.
Talk to you soon, folks.
Jeff Clark
Editor, Market Minute