May has left the building and the market has not gone away. Markets are stubbornly hanging on in divergence fashion with the Russell 2000 having made a new high, the Nasdaq 100 (NDX) very close and the Dow lagging badly. The Dow has never held above the mysterious balance line I’ve discussed many times since March.
Tech is going to have to take the lead from this point forward because it does appear the market will lose oil. It may or may not lose oil stocks yet because it’s the stock that generally leads the commodity but with each passing day, it now looks like crude oil topped out. The oil complex peaked in a 233-day window, Heating oil exactly on the number with crude oil a couple of days later. More importantly crude continues to violate important technical markers such as the connect the dots trend line going back to February. This is good news for consumers but for producers not so much. The speed of these technical violations has been startling.
One would’ve expected bulls would’ve made a stand at the first brown line in the middle of the range, but it went all the way to the bigger line in only 4 days. The bounce failed and now they’ve violated the line altogether. It’s good news for consumers because gas prices are likely to start retreating in a couple of weeks. But the violations suggest something bigger is going on.
That’s not the only thing markets have to be concerned about. Suddenly the BKX took a hit last week and looks very ordinary on the relief bounce.
Even before I had my coffee this morning this NDX chart woke me up. This chart is not at a new high yet although its close, but don’t you agree it looks like a wedge? Last week it appeared the markets could’ve unraveled but the tech indices put in a small degree calculation with last Tuesday’s low. You see that small low which is the same day the banks got clobbered. I told my group that before they got real bearish to watch that low because it was likely to end up higher. I thought we’d end up with more divergences and we have even as markets are generally higher. We have a situation where certain areas are outperforming others but its not like some areas are going up while others are going down, unless we look at the oil market.
These two charts represent the most interesting conditions to start the week. Can the NDX peak by Wednesday based on this trend line? Can crude somewhat hold the line before a collapse? With the exception of February, markets have shown incredible resiliency and ability to heal. One has to wonder how many more times they can go to the well considering the stock market no longer has the seasonal wind at its back.
Even the geopolitical situation helped. One of the big reasons the market got indigestion was the events in Italy where the President vetoed the new Prime Minister’s pick for Economic/Finance Minister. They averted the potential for serious domestic unrest in Italy where they will have somewhat of a triumvirate where new Prime Minister Conte was sworn in but populist party leaders Salvini and M5S Luigi Di Maio will both be Deputy Prime Minister. This is a coalition of anti-establishment and Eurosceptic. The situation became chaotic when anti-euro economist Paolo Savona who is a Eurosceptic economist was prevented from becoming Economy/Finance Minister. Instead, he now becomes European Affairs Minister.
The Italian President feared markets would get hit hard upon his nomination. Too late, markets already got indigestion based on the instability in the new government. While the BKX had an incredible square out at the recent high, in the natural the Italian news was credited with taking down the banks. Credible reports on the ground in Italy suggested had this situation not been worked out there was the potential for massive civil unrest. It lines up with another of our longer-term themes. Thus far, we’ve been very fortunate that every time the world has come to the geopolitical ledge, they’ve pulled back. Credible military experts spent months warning there would be conflict on the North Korean peninsula. Now the summit is back on. It was only a couple of months back where the same experts feared a wider conflict in Syria. That hasn’t materialized either. Markets are certainly benefactors of all this "decent" geopolitical news. I use these words carefully as these situations have held the line, the world remains filled with problems, risk and potential black swans.
Finally, the bond market appears to have made an important low for the time being. It staged a strong bounce into the middle of the week where it finally retreated. Another important marker is to see how the stock market will respond to a relief rally for interest rates. On the biggest day up last week for bonds (in terms of price), that was the day the banks got hit hard on the Italian news. The stock market is going to have to stop behaving like the Mets who regularly lose when their ace deGrom pitches. If rates and oil could be lower, the stock market should take advantage of it. If it can’t this might be the biggest ‘tell’ of all. It’s something I will be watching very closely this week in addition to everything else.
Next week is the Fed meeting where Powell gives his important press conference and the week after is the seasonal change point. The June change point is always interesting because it comes so close to 6-18. June 18 is golden spiral day and probably only recognized in my house but if you pay close attention to charts you will see the type of influence it really has.