Bull Markets Still Have Corrections
*This article was posted to MOTR Research on July 18 th . However, it feels even more relevant now given the recent record spike in volatility. If you want to become a subscriber and get these reports with no delay, begin your free trial today !
Although our Risk Gauges show the market’s internal health to be as strong as it has been since before 2021, this doesn’t mean sudden corrections won’t happen. What this means, rather, is that the market is in its best health in over three years, providing the wherewithal to handily navigate and survive such sudden setbacks.
So, while these bouts of selling take hold, we are focused on how well the market handles it, not the fact that it is happening. For now, our trend model shows the medium-term (monthly) Momentum Support Zone for the S&P ETF (SPY) to be between 521-537, which just overlaps the bottom of the short-term (weekly) Trend Support Zone at 536-542.
Additionally, we have the trendline off the October’23 low tracing through the 545 area. Since trends do not happen in a straight line, we should not be surprised by this pullback. We are buyers of this weakness, understanding that we do not want to see the lower end of monthly support give way.
The real trend to watch however is the small cap Russell 2000 (Figure 2). The 220-230 area is major resistance, and is thus far holding. Again, this should be no surprise. Would it be better if the IWM showed so much one-sided strength that is just barreled through there? Sure, but that’s not necessary, or even relevant.
While the IWM wrestles with this overhead resistance, we simply need to see supports hold. In this case, we are focused on the 195-205 zone (Figure 2), which has served as both support and resistance since early 2021.
Above here, we are bullish, looking to buy weakness in leading stocks and industries. At this point, Energy, Discretionary, and Staples are the only sectors showing fewer relative breakouts than relative breakdowns over the past 5 days.
The strongest sectors from this perspective have been REITS, Financials, Healthcare and Communications. If this persists, we will have evidence of capital not only rotating to smaller caps, but also to new sectors.
This too makes sense since the small cap space is dominated by Financials and Healthcare. All of this would be considered bullish rotation, reinvigorating the market for the next leg higher, giving the MAG7 a breather for a period.
Our Latest Thoughts:
Since this post was published, the market faced record volatility and dipped into the zones that we highlighted. Throughout this time period we continued to urge clients to buy the weakness as the SPY tested long-term support. As we now know both the SPY and IWM have had impressive rallies since August 5th and are now at crucial resistance levels. Friday (8/16/24) we will be updating clients with our latest thoughts . If you are interested in getting this report with no delay, head over to MOTR Research and begin your free 30 day trial today!
