“In the business world, the rearview mirror is always clearer than the windshield.”
(Warren Buffet)
Key Points:
· Interest rate fears resurface as 10-year heads to 5%
· 2 & ½ ST-uptrend in jeopardy
· 5/24 presented a bearish engulfing day
· 50 dma lurks below
· Financial complex fails to confirm
· Record issuance of corporate debt
Market Commentary
Given the market’s “jittery” feel, we believe now is an appropriate time to outline the current state of the “Four Sisters.” On 5/24, the Sisters experienced a bearish engulfing day (outside day) but then proceeded to run higher during the holiday shortened week on the heels of strong economic data. This enthusiasm has been short lived as investors fret over interest rates with the yield on the 10-year surpassing the psychologically important 5% mark.
Against this backdrop of anxiety, Morgan Stanley’s bearish call on European stocks certainly caught the attention of many as the DJIA broke its 2 & 1/2 month ST upward-sloping trend (13,500). The next level of interest for the eldest Sister will be the horizontal support level of 13,440. If breached, the 50 day moving average is in play.
One main concern we’ve had for awhile is the apathetic action of the financials. The XLF as seen below was unable to confirm a move higher as each recent attempt stalled dead in its tracks. With a Stochastic divergence and weakening RS line, a test of its 50-day moving average is likely if the XLF violates its May low on a closing basis.
Nonetheless, we need to realize the importance of the credit cycle. The record $143 billion of corporate debt issued last month will certainly pave the way for more LBOs, M&A and stock buybacks. And with the spread on junk hitting its lowest historical level last Friday, one could presume that a sell-off in equities could be dampened by another flurry of corporate spending.
Stay tuned & good luck!
Until next time…
Tuttle Asset Management Team