The Market Is Severely Overbought on Several Metrics

Another strong finish yesterday put the indexes near some very strong resistance. The SPX 500 closed just a touch under 4000, there is a gap to fill at 4017, and that could be filled in days. However, we caution the market is now severely overbought on several metrics.

What does that mean exactly? Buyers have been coming after stocks for the past seven sessions, and eventually sellers are going to show up in a hurry. Does that mean this part of the rally is over? Not necessarily, but remembering as this bear market rages on, there will be difficult moments when the market gives back large portions of recent gains. Since the start of April, this sort of thing has happened on at least nine different occasions.

Jobless claims yesterday came in a bit higher than expected, which may lead to a weaker jobs report next month. Leading indicators were also weaker, while the Philadelphia Fed manufacturing index missed by a country mile. This index has mostly been below zero in 2022, no surprise as we have seen big pressure on manufacturing with supply chain issues.

European PMI’s came in much softer than expected, in Germany and France we saw the 50 level breached for the first time in months, indicating contraction in manufacturing. England is slowing down too but is not at contraction levels.

Verizon (VZ) earnings were released this morning, they were mostly in line, but the company guided down slightly. Look for a separate piece coming to your mail box later today with a more comprehensive review.

Markets are up strong for the month of July, more than 5.7%. That’s a big number for any month, but certainly very strong in a bear market. What would it take for the bear market to vanish? Probably another 2-4 months like July, but that is a pipe dream. The economy is slowing down, inflation is still elevated. Fund managers are not going to pay up for earnings that continue to contract. Therefore, the prudent approach remains to be cautious, with eyes wide open.

Next week brings us a Fed meeting, big earnings and the end of the month. Volatility is down but that is likely to change drastically. Protection is always warranted – we are using inverse ETF’s and heavy cash to protect our positions.