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June 10, 2024

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Stock market momentum indicators are deteriorating, with growing bearish divergences.  

The S&P 500 stock price index (symbol: $SPX, 5,346.99) rose 1.32% last week, but it lost a little bit of its bullish momentum on Friday after the excessively strong employment and wage growth numbers. The most recent price strength since 5/31/2024 probably reflected change-of-month seasonal adjustments to trading positions and perhaps resilience within the longer time-frame uptrend since the price low on 10/13/2022 as the bulls continue to outnumber the bears. $SPX remains systematically bullish, but in the bigger perspective, the stock market remains quite overbought by traditional value standards. And there is a growing problem of technical divergences, which only grew worse last week as most indexes and indicators failed to confirm the higher highs for the S&P 500 and Nasdaq 100. The large-cap stocks of a favorite few technology stocks (only seven dominant corporations account for 31% of the weight of the S&P 500) have continued to boost the capitalization-weighted S&P 500 relative to the broad list of thousands of stocks, which increasingly are lagging behind. In recent weeks, sentiment indicators (which generally follow the price trend) mostly show bullish complacency, following overbought Greed readings during the stock market rise from October to March. Economic data has been confusingly mixed, Fed policy is in an uncertain wait-and-see mode, and interest rates appear stuck in back-and-forth price action as investors and the Fed struggle to sort out mixed and changing data on the economy and inflation. On the whole, an uncertain outlook calls for caution.

Unweighted price indexes and breadth indicators for the broader stock market are underperforming and diverging bearishly from the S&P 500 price index this year 2024, suggesting that the broader stock market is not as strong as the large-cap stocks that dominate the S&P 500.  Less than half of the S&P 500 stocks are currently above their own 50-day SMAs. The number of Net New Highs ($NYHL), now at -3, turned technically bearish. Even the previously strong Cumulative Advance-Decline Issues Line turned weaker than the S&P 500 price index last week, indicating bearish divergence.

The economic data for the week were mixed, as usual, but on the whole indicated a sluggish economy--except for higher employment and higher wage inflation, which are stronger than the Fed would like and are moving in the wrong direction (higher). The Federal Open Market Committee (FOMC) meets next week to try to decide what to do about it. The FOMC and most investors have been expecting that sluggish economic data would lead to a “soft landing” and no recession, but a few still worry that “sluggish” could turn into “weak” and tip the economy into a recession. A recession could mean big risk for the stock market.

  • ISM Manufacturing PMI fell, was below consensus estimates, and remains sluggish.  
  • Construction spending fell 0.1%, was below consensus estimates, and remains sluggish.   
  • JOLTS job openings fell, was below consensus estimates, and remains in a steep downtrend since March 2022.
  • New orders for US manufactured goods rose, were above consensus estimates, but remain at a subdued level.   
  • The RealClearMarkets/TIPP Economic Optimism Index fell, was below consensus estimates, and remains in a downtrend since February 2020. Americans are pessimistic about their own finances over the next six months.
  • ISM Services PMI rose, was above consensus estimates, but remain at a subdued level.   
  • ISM Services Employment rose, but was below consensus estimates, and remains at a subdued level.   
  • Initial Jobless Claims rose and were slightly higher than consensus estimates. Claims appear to be firming slightly since 5/4/2024 but are still very low compared to their 50-year history. Low claims indicate a strong job market.
  • Non-Farm Payrolls rose strongly and were far above consensus estimates. 
  • Unemployment Rate rose and was above consensus estimates. The Unemployment Rate remains well below its 50-year average, however.
  • Average Hourly Earnings rose and was above consensus estimates. Average Hourly Earnings rose 4.1% over the past year, more than double the Fed’s inflation goal of 2%.

 Our Colby Economic Expectations Index turned down in April and May, indicating actual data releases have turned weaker than the consensus of economists’ forecasts.  

 Financial Stress continued to decline, which is bullish for the economy and for stock prices.

As we continuously weigh and measure all the technical and fundamental data, we conclude that a conservative long-term investment strategy with emphasis on preservation of capital is rational and prudent when market risk is high. Speculators and traders who wish to play short-term momentum need to pay very close attention to risk control because short-term trends are fickle and change frequently.

Summary of Current Issues Impacting the Financial Markets

See The Colby Global Markets Report (click herefor our complete analysis of global markets and specific investment rankings.

Every day, we use technical, fundamental, and quantitative analysis to judge the Reward/Risk probabilities of trend continuation or reversal. We strive to control risks and to make sure that all of our clients are safe and protected from large losses. If you want to earn reasonable returns while avoiding large losses, move your wealth to our professional fiduciary asset management. We always put our clients’ best interests first, and we are always here to help you in times of stress.

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Robert W. Colby, CMT,
is a consultant to institutional and private investors and traders, providing regular analytical reports, custom research services, and trading systems tailored to clients' objectives. Clients include the most successful traders and investors in the world. Robert is the author of The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill, 2003, which has become the standard reference for indicator and trading systems design. Previously, at several large Wall Street firms, Robert worked as a proprietary trader, technical analyst, and fundamental analyst. He also was adjunct professor at New York University and New York Institute of Finance, where he developed new courses on technical analysis and market timing.

Robert W. Colby is a Chartered Market Technician (CMT), an accreditation granted to members by the CMT Association (https://cmtassociation.org/) after demonstrating professional competence and ethics over a period of many years. Robert has been a member since 1980, and he strongly supports the CMT Association's high standards. He also supports the The Technical Analysis Educational Foundation (https://www.taeducation.org/about/), which works to have technical analysis included in the curriculum of major business schools. "The CMT Association is the national organization of investment analysts, stock market analysis professionals, and certified market technicians in the United States."

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