Keith Schneider | Jul 18, 2021 04:56AM ET
The recent run up to new highs in both the S&P 500 and the NASDAQ 100 came to an abrupt halt last week, and our Risk Gauges flipped negative in short order. It is also important to note the selloff in the SPY was not overdone and has a lot more potential downside.
Even more critically, IWM looked extremely vulnerable, which was testing a well-formed valid 6-month trendline that has helped keep the rally intact. If it breaks, there is a good chance that it will drag the other key benchmarks down along with it.
Weak seasonals around presidential cycles are also kicking in right now, yet another headwind.
Also, our reliable TSI (Trend Strength Indicator) is on the verge of flipping negative on IWM, yet another major warning.
Only two sectors were positive on the week, and both were risk-off plays; Utilities (XLU) and Consumer Staples (XLP), yet another major warning.
Soft commodities (DBA), and gold (GLD) also bucked the selloff while (KRE (Prodigal Son/Regional Banks), which likes higher margins on higher rates fell, indicating a dovish Fed despite inflationary pressure.
All this shows that the Fed is ignoring the recent inflation numbers and hoping that “transitory inflation” is underway, unlike the 1970’s.
Considering the Virus is still NOT under control, it’s NOT a shocker that Risk-off has been tripped, and stagflation could be rearing its ugly head.
At any rate, that is how we are reading the tea leaves at the moment.
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