April 24th, 2023

Is Market Breadth Warning Us Of An Upcoming Shift?

This is a big week for earnings.  Some of the major tech stocks like Microsoft (MSFT), Alphabet (GOOG/L), and Meta (META) will be giving us an indication of where the economy may be heading.

Last week we had surprise numbers in GDP showing the economy is growing while everyone beats the recession drum.  Maybe the 1st quarter will ultimately be the best quarter of the year.

But the tech stocks and their race for artificial intelligence supremacy will be on display and could be the catalyst we need to break through 4200 in the S&P 500.  

Why do I bring up 4200?

I’ve written about how that is a key level and if we don’t make a new higher high, we could get a change in the market trend that started in October of last year.

Looking at the market momentum of NYSE components, we still have the number of new 52-week highs, 6-month highs, and 1-month highs outpacing the number of new lows for the respective time periods.

However, we can’t ignore that the number of new 5-day lows outpaced the number of 5-day highs by a ratio of 1.83 to one.

My point is this week is going to be a crucial test for stocks as we come closer to another FOMC meeting where the Fed is likely to increase interest rates another 0.25 basis points. The market wants a pivot to happen, but I wouldn’t expect to see the Fed do that after last week’s economic data showing that inflation is stagnant.

While I do believe people are overlooking the bullish movement in the stock market, I am getting increasingly more cautious at these levels, especially if the number of stocks heading lower is outpacing the winners.

If we’re already seeing bearish pressure after earnings that appear to be neither good nor bad, and the market acts surprised that the Fed raises rates, we could see a double-digit sell-off to start off the summer trading season.

Will earnings save the markets this week?

I don’t have a specific trade with strike prices and expirations today.  But that doesn’t stop me from having a trade idea. I’m looking at the SPDR Industrial ETF (XLI). 

The 1-month and 6-month trends are both bullish and we’ve seen some industrials come away as winners so far in this earnings season.  

It doesn’t hurt that XLI typically does well during the next 6-week period. Over the last 20 years, the ETF has returned positive results over 70% of the time.

I’m not looking for a major move, but I think it will overcome the double top at $101.80 on its way to go test the previous swing high of $103.75.

Why suggest a bullish trade after writing about being cautious at these levels?

Well, it’s a neutral to bullish pick on industrials and I think there is a small opportunity there while we get a clearer picture during the hectic earnings week.

If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]
Phone: (866) 257-3008

Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.