The market enjoyed a good rally last week, which was expected due to oversold conditions and excessive bearishness. Next week will most likely be dominated by choppy, non-directional trading. The indicators are saying that bulls are not able to get complete control of the market, while bears stepped aside for a short while. Also the market will be “on hold” until the FED meeting. The quality of the latest advance suggests that June and July lows will eventually be broken sometime in September or October, but we are not in a hurry to establish short positions yet. The market will have its regular monthly “Fed is done” rally 15th month in a row. I suspect however, that this will be the last one. The FED is probably done (it is about time), which means that the market will face a new concern – slowing economy. Right now the probability of a recession is still relatively low. If it remains this way, a mild slow down will cause only a regular correction in stocks. As we all know, stock prices predict the economy, not the other way around, therefore we concentrate on technical analysis, which is a better predictor of stock prices and therefore the economy.
Large cap stocks continue to lead the rally, which is not what bulls want to see. A healthy market is led by NASDAQ and small caps. While I am expecting more upside in NASDAQ and other high beta indexes, this upside should be viewed as an opportunity to sell stocks and establish short positions over the next couple of weeks.
OEX (S&P 100) divided by Russell 2000 daily:
This chart illustrates how the large cap stocks have been outperforming small cap stocks since April, and the latest rally has not changed this relationship. This is a bearish development for the stock market.
Dennis Leontyev
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