Week 33 Market Backdrop Review (Aug 14 2023)
Market backdrop based on key benchmarks this 33rd week 2023
We will be doing a quick short review on key benchmark charts and discuss market events that happened on week 32 ‘23 so that we can prepare on how we can position in the US equities market.
SPY 0.00%↑ Pulls back to the 50day-SMA, mean reversion soon?
SPY currently kissing the 50 day SMA (MA50) - marking the 2nd week of decline since its July 28 high. 10 day average now currently below the 20 day MA which is the first short term bearish MA crossover since the rally after breaking out of the accumulation range.
Bull case: If the 50 day MA holds and recovers above $450, breaking above the continuation wedge we might see buy on pullback opportunities materialize.
Sectors/ Themes to stalk on bull case: XLK 0.00%↑ (Tech) SMH 0.00%↑ (Semicon sector) ITB 0.00%↑ (Homebuilders)
Bear case: If SPY breaks below the 50 day MA, next key support level based on volume by price (VBP) is $430-440 area and possibly create a base at that value level. At worse, next key support is at $420 area.
Action on bear case: For long only swing and position funds/systems, it will be a sit and wait situation. Better wait for a good established base for SPY and QQQ then look to position on strong names on strong sectors with tradable setups in prep for the next rally transition.
QQQ 0.00%↑ below MA50, will we see further sell off in tech?
QQQ currently below MA50 - as well as the $370 previous resistance turned support level. If the Qs does not recover above $370 within the week, next support level will most likely be at $350 based on the VBP structure.
What we want to see: Recover above $370 and break the wedge structure same w/ the SPY
MDY 0.00%↑ and IWM 0.00%↑ midcaps and smallcaps still can’t achieve exit velocity
MDY 0.00%↑ (midcaps) and IWM 0.00%↑ looks to have resisted at the top range of the accumulation structure and showing signs that its not yet ready to transition to Stage 2 (markup phase). Pretty much this signals us that what we can do is to temper our expectations in small and midcaps - that we can only trade the swings and it is not yet a trend following market in this marketcap category.
What we want to see for a strong bull in small-mid caps: Hold and sustain above the MA50 and break above the red zones (resistance area). Once these indices break above that level , then we can see strong participation in this space and will be reasonable to establish positions in small and midcap names.
Strong dollar, yields, and inflation smacks and tames the young bull?
The recent dollar strength still proves to tame market rallies. The dollar still showing strength and currently trying to break above the resistance trendline(RTL). If this breaks above the RTL we might see further selloff in risk assets (US stocks, crypto, etc).
What we want to see: For the dollar to resist at this RTL, break below $102 and create another downswing toward $100 level. If this happens, we might experience a short term rally in equities.
10 year yields rallied once the July inflation print was released last week (CPI and PPI), bond markets reacted quickly to the somewhat slightly disappointing inflation data as the inflation print still showed strong inflationary pressures. In effect, giving a higher probability that the FED will keep a hawkish stance despite chatters that the next rate hike will be the last hike this cycle.
Quick lesson | Hawkish Dovish?
Hawkish= Fed's stance favoring higher interest rates to combat inflation
Dovish = Fed’s favors keeping interest rates low to stimulate economic growth.
US Core inflation rate (YOY) slightly below previous, but overall inflation rate (YOY) higher than previous month inflation rate (June 2023). PPI higher than previous which shows a possibility that inflation will still persist as inflation experienced by businesses will be passed on to consumers.
Quick lesson | Inflation and interest rates
If inflation increases and stays elevated, FED’s tendency on its monetary policy is to keep interest rates high. This is to ease inflation by restricting/controlling liquidity and credit in the market and in the economy.
Mid to long term market breadth in danger levels
% of stocks above 20-day ave still below 50% signaling persistent short term bearishness. % of stocks above 50 and 100-day averages nearing danger levels, if this breaks below 50% we might see further selloffs in the markets.
Verdict and strategy with the current market state
With the market still on a bearish tone, what we can do is to stalk at strong sectors/market themes with good market structures such as but not limited to:
XLK 0.00%↑ - Tech Sector
ITB 0.00%↑- Homebuilders
IEZ 0.00%↑ - Oil and services
XLI 0.00%↑- Industrials
Once the dust settles, most likely these sectors will lead the markets again and the names under it. You can go to justetf.com to check the composition of each ETF mentioned above and look for setups.
My core strategy in this market state - since I am a long only trader is to just sit and wait for market breadth indicators to bottom out and recover. I will be most likely limiting my capital exposure in equities to 20% with 80% of my portfolio in cash.
I will be looking for swing setups at key dynamic support levels in strong names with good relative strength vs the market. It will be a plus if it is in a good sector.
I am expecting the market to be at a volatile undecided state. Many setups might be faded so position size accordingly and set reasonable stops.
Markets will most likely find its footing after the jackson hole symposium by the FED this Aug 24-26, 2023 once the market gets a grasp on their tone on the FEDs policy stance.
Great defense, is great offense.
Best of luck to us this 33rd trading week of this year! Cheers!
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Money is MADE and KEPT in the sitting, not trading.
You don’t have to trade when the market backdrop is currently not in favor with your trading system. Be patient that you just have to wait out the storm.
Never give back to the market your earned profits from your previous trades.