The Cincinnati Reds are on a run. So is the market.
The team that was forecasted to be one of the worst in the league this season, yet, has strung together 11 wins in a row. It's a great feeling, because everyone loves a streak.
Investors are no different. Investors love it when the market gets on a streak like its been for the last few months.
The Invesco QQQ Trust Series 1 (QQQ) is up 8 out of the last 10 weeks. And the one losing week was just barely. That's a nice streak.
Stories about Tesla Inc. (TSLA), Apple Inc. (AAPL), and even Delta Air lines, Inc. (DAL) streaks have been splashed all over the news.
This all begs the question, is the streak ready to end with this week's loss?
The answer is 'not necessarily.'
Reason One: The Market Needed a Breather
Just like a runner in a marathon, the market needs to pace itself to make sure it doesn't crash. Three or five percent corrections in the midst of a bull run are what we refer to as "healthy corrections".
They give stocks a chance to rest, but more importantly, these corrections offer opportunities.
Volume naturally drops as we extend these streaks. That's because fewer investors want to buy when the market has had a solid rally. They want to "buy the dip". A healthy correction gives them that opportunity.
We need to see investors begin to buy after this decline.
Reason Two: Sentiment is Stretched
The CBOE Volatility Index (VIX) is low and the "Greed Index" from CNN is high. That's a sign...
Investors are more bullish than they've been in the last year. Check out my comments about the market's expectations here
That can be a problem.
A "controlled sell" could knock the optimistic froth off the market and allow things to reset.
One thing to keep in mind here is that a shallow selloff will not allow a reset of investor's high expectations, instead, it would just delay the selloff which would then be larger in magnitude.
Reason Three: Seasonality
We're in the midst of the 25th week of the year for the market. Historically, this is a three-week period that sees some weakness.
The chart below displays the average weekly seasonality for the S&P 500 over the last 20 years.
Note the drop in weekly returns for the period heading into "week 26", which is one of the more decidedly weak weeks of the year (say that fast three times).
Here's what I'm Watching Monday
The QQQ $355 level needs to hold.
This is where the popular ETF's 20-day moving average (MA20) resides. I call it the Trader's Trendline because short-term traders watch this trendline closely.
A rally from that trendline will signal a high probability that the "buy-the-dip" traders are grabbing this healthy correction.
The Russell 2000 Index ETF needs to hold $180.
The iShares Russell 2000 ETF (IWM) indicates the risk appetite of the market. We just started seeing some strength in the IWM over the last few weeks. That needs to remain the case for this rally to avoid deeper selling.
Strength in the Banks
The regional banks started seeing selling this week. I'll go more into that on Friday, but the bottom line is that this sector must see buyers next week. Remember, this is the sector that caused fear and selling to go wild in March.
A continuation of this week's selling will signal that investors are losing faith in this rally.
The post This Rally is About to go on Hold appeared first on Penny Hawk.
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.