Last week we talked about the potential for a short-term “Dead Cat Bounce” as stocks had stretched their prices too low too fast. The short-term outlook improved just in time for “Week 11” seasonality to carry stocks higher.
While we didn’t see the massive move that seasonality was calling for, stocks did break their four-week losing streak with a nice rally on Friday. That move has given more confidence to investors to become a little more aggressive in buying the dip.
It couldn’t happen at a better time.
This week’s economic calendar is relatively light until we get the Fed’s favorite inflation read on Friday. Right now, the PCE Index appears to be the only thing that could get in the way of investors moving stocks higher through the week.
That said, please don’t get too comfortable hitting that “buy” button, especially on the retail, transportation and semiconductor stocks. All three of these sectors – and five others – are already trading in bear market trends.
Make sure that you read on as I dive into the three sectors with the biggest implications for the market and your portfolio below.
First, let’s take a look at the Economic Calendar.
Last week’s Fed meeting turned out to be a whole lot of nothing new as investors had already figured Jerome Powell’s message out more than a week before the meeting. Bottom line, we’re not going to see any changes to interest rates until the Trump Tariffs start to find their way into the economy.
The Fed Chairman also hinted that the economy appears stronger than expected as the Fed expects GDP to become stronger than originally forecasting. That begins to paint a “Goldilocks” scenario for the economy that would help the Fed to start dropping rates as early as June.
We’ll have to get through a few big data points this week first.
Bottom Line: With very little on the line – from an economic data perspective – the market will want to pull through and rally until Thursday’s close.
Stocks have been near oversold readings of their technicals for more than two weeks and last week was the perfect setup for a dead cat bounce, as we discussed. This week’s light data calendar and the market’s short-term momentum are likely to push stocks higher through the week.
That said, expect that we will see a pulling back on the bullish reigns as Friday gets close as an unexpected suggestion of inflation in the PCE report will send this market back to its lows in short order.
I mentioned in yesterday’s market preview email that there are already eight major sectors, or industries, that are trading in a long-term bear market.
At any given time, its not unusual to have a few sectors bouncing in and out of this classification, but eight… that’s a larger than normal event and it warrant’s your attention.
If anything, these are the sectors that you may want to steer clear of as they each lag the broader market’s performance. Of course, there may be a reason or two to hold stocks from these sectors but know that each faces their own headwind.
One is a concern as an age-old theory having to do with it forecasts that the broader market is highly likely to move into a long-term bear market cycle. It’s the transportations industry and I’ll go into the details in just a few minutes.
There are more than a few definitions of a bear market out there.
One popular definition asserts that a 20% drop in a stock, ETF or index, like the Nasdaq 100 (QQQ), puts it in a bear market.
Another that I prefer to use is the simple measure of whether a stock, ETF or index is trading above or below its 20-month moving average. That measure allows for the situation to adjust to periodic volatility and aggressive moves higher and lower. It also provides a convenient line on a chart.
The chart below displays the Nasdaq 100 (QQQ) with its 20-month moving average. For reference, the red and green areas identify when the Nasdaq 100 was below (red) or above (green) its 20-month moving average.
The eight sector ETFs that are either in or on the edge of trading in a bear market trends all have a common denominator, the consumer and economy.
For now, consider each of these sectors, and the stock that make them up, as risk allocations as the long-term trends will favor lower prices in each.
Let’s take a few minutes to go through the three with the largest implications for the broader stock market.
Retail activity is at the heart of our economy. Historically, the retail sector is one of those that leads the market lower when we're heading into economic uncertainty. The reason for that is simple, investors tighten up their budgets and spend less, resulting in lower revenue for these companies.
For that reason, a drop into a bear market territory of the XRT shares is an indication that the market is heading into a period of economic softness.
This year, consumers are pulling back out of the fuel of inflation. Prices at the grocery store are heading higher, impacting the rest of their spending, especially those discretionary items.
An interesting twist? Last week's earnings report from Darden Restaurants showed that consumers are continuing to dine out. This follows a pattern that we saw in 2023 as diners figured out that inflation at the restaurants was slower to rise than at the grocery stores.
Companies like Walmart, Costco and Target have shifted into short-term bearish trends, indicating that the breakdown in the sector is about to get worse.
The retail sector broke into a long-term market trend in March as the XRT dropped below $72.
The sector has found short-term support at $70, though investors should expect that this is simply a short-term bounce from oversold prices.
Expect that the XRT will target a price of $60.00 over the next four to six months and that the major components like Walmart, Costco, Target, Best Buy will continue to see selling pressure.
This is a sector and group of stocks that are worth avoiding.
The Transportation sector trends hold a special place for market analysts given one of the oldest market timing theories around.
A simple version of the Dow Theory developed by Charles Dow, assumes that the broader market must be led higher by transportation stocks. The rationale behind this is relatively simple and makes sense.
Transportation companies typically ship goods across the country for sale on retail stores or as part of the construction of a product that will end up being consumed in the economy.
This includes construction products, everyday products on the shelf, vehicles, and raw materials.
A slowdown in the rate of transportation of these items typically indicates that businesses are requiring less products as they plan for a broader slowdown in consumption.
The modern-day transportation index also includes airline companies. This means that increases and decreases in flight by consumers or business travelers. Is provides an additional view of consumer demand.
Companies like CSX. JB Hunt Trucking. And Delta Airlines have all been holding off in a wide trading range at the top of their prices. Over the last month, we've seen this group of stocks start to weaken as investors expect that the transportation stocks are going to move into a longer-term bear market.
Last week, the Ottawa YT dipped below its twenty-month moving average, a warning sign for the Transports. This Monday, the ETF was able to pop right back above that Technical Support.
Investors are looking for confirmation that we may be moving into a long-term bear market. We'll watch the $65 price level of the IYT.
A move below that price, followed by a break below $60.00 will indeed confirm that the broader market as measured by the S&P 500 is heading towards treacherous grounds.
Call it a modern-day Dow Theory reboot.
It's rare to find a product that does not have a semiconductor in it. Cars to boats, lights in their house, heaters, computers, watches and freezers… everything has a semiconductor chip.
Same idea as the Dow Theory demand for semiconductors and tracking the semiconductor stock prices gives you a good indication of whether the market is seeing an economic slowdown.
This theory worked perfectly in 2022 as the semiconductor sector rolled over ahead of the S&P 500 moving into a bear market.
Conversely, it was a semiconductor sector moving back into a bull market trend in 2023 that led the broader market into a long-term bull market trend.
More recently, companies like NVIDIA, AMD, Micron and Broadcom have bolstered the value of the semiconductor sector as investors look to get ahead of AI technology. Those jumps in prices sent many of the semiconductor stocks into “Bubble” status on high valuations creating the potential for a revaluation of the semiconductor stocks.
Nvidia's latest earnings report acted as a sort of “confirmation” that the market had overvalued the sector, triggering broader selling.
The semiconductor ETF's 20 month moving average stands at $225. Investors can expect significant support at the $200 level but a break below that will indicate that the sector is set to continue to a possible target of $150. That would represent a 26% drop from current prices.
