Stock Market Bounces to Resistance

What is it? 

Stock market benchmarks like the SPDR S&P 500 ETF Trust (SPY) bounced last week before meeting resistance at prior price levels. While stock prices have moved slightly higher, there was not a significant amount of volume. One way to think of it is that stocks were bought at higher prices but not everyone jumped on board to send prices much higher. 

Why does it matter?

Take a look at the daily SPY chart over the last three years as of market close on Thursday July 21, 2022. 

StockCharts.com

As you can see, the stock price of SPY has been making lower lows and lower highs since it broke its uptrend earlier this year. We believe that we should avoid adding to investments that are in a downtrend until they break it to the upside (i.e. making higher lows and higher highs). Until then, we assume that the security will continue on its downward path.

Factors on the Matrix

What is it? 

We track the following handful of  factors to give us an insight on the overall financial investment markets. Adding them to our Matrix gives us an idea of how the markets are pricing these asset classes or indexes within the overall economic environment.

Why does it matter?

Overbought:

UUP represents the value of the U.S. Dollar Index. The index shows the strength of the US Dollar compared to other currencies. The UUP has been on a tear lately and has reached our Overbought level last week.

Strong:

Next would be the two-year U.S. treasury yield (denoted as 2YR). We believe that the two-year Treasury yield is still showing strength as the markets are continuing to predict hawkish Federal Reserve decisions.

Neutral:

TNX, which represents the ten-year US Treasury yield, has been weakening over the last few weeks. What is interesting is that a stronger 2Y and a weakening TNX may mean that the Yield Curve may inverse further which has been a bearish signal in the past.

VIX is also in the neutral section. VIX is the stock market volatility index. Volatility, measured by the VIX value, calmed down to its lowest point since April.* 

Weak:

OIL (an ETN tracking the Crude Oil Index) has more recently broken its bullish trend. Around the same time, GLD (The SPDR Gold Shares Trust) fell below a support level and has since bounced short term but not back above that level. This may be seen as a positive for the markets and the economy as they are trying to shake off inflation issues.

Lastly, we can see that VT or the Vanguard world stock index ETF is still very weak. 

Conclusion:

In the history of bear markets, investors have experienced short rallies to lower highs. Until we hear of meaningful catalysts and changes in broad market trends, we will keep our defensive stance. 

Other articles we found interesting this week:

The Fed Is Upside-Down on Inflation and That’s a Big Risk

Wall Street closes higher on strong Tesla earnings

All eyes on ECB’s policy announcements

Current 401(k) portfolio

Our last portfolio reallocation: 5/19/2022. 

Want more information?

The weekly market insight provides a window into the process we use in our investment management process. At Breakaway, we believe markets are always changing and require a nimble yet data-oriented approach. 

Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.

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Sources:

*StockCharts. “$VIX”. StockCharts.com. 7/21/2022. https://stockcharts.com/h-sc/ui

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