Will More Crazy Tariffs Stop The Most Hated Market Rally?

Forbes

6 days ago

Food inflation, Consumer price index or CPI. Prices of commodities and consumer goods rose due to ... More rising inflation. Consumer goods float with air balloons.
After a strong performance on Thursday, the stock market gave up some of its gains on Friday for a mixed weekly close. New tariff threats on Canada and Mexico did raise the market's concern of more tariff chaos in the weeks ahead.
Overall many are looking for just a slight increase in the CPI on Tuesday. FactSets consensus estimates are looking for an increase to 2.6% on an annual basis up from 2.4% in May. It is expected that core good prices will be higher in addition to health and travel services.
On the plus side a decline in auto prices is expected as the demand is now lower after the strong buying in March and April. Shelter prices are also expected to move lower. A decline in the CPI is expected to increase the odds of a September rate cut that is currently at 60%. If instead the CPI increases then the Fed has the room to hold off longer on cutting rates.
Markets
The market scoreboard was split, with the Dow Jones Transportation Average and Dow Jones Utility Average both up 1% for the week, followed by a 0.7% increase for the SPDR Gold Shares (GLD)
The Dow Jones Industrial Average was down 1% while the NYSE Composite closed down 0.9%. The S&P 500 made an a new record on Thursday but then declined Friday to close down 0.3% for the week. The Nasdaq 100 was just a bit weaker as it was down 0.4% while the iShares Russell 2000 closed down 0.6%.
On a year-to-date basis, GLD is still the big winner, up 27.7% while NDX, the S&P, and NYSE Composite are up from 8.4% to 6.4%. There are a number of performance milestones as well as advance/decline signals this year that point to even better stock gains for the rest of the year.
S&P 500 Returns After A Three Month Rally
This chart from Ryan Detick and Carson Investment Research shows what has happened in the past after a three-month rally of more than 25% in the S&P 500. If there is an average six-month return of 16.9% it would surprise most on Wall Street and beat most year-end targets. Ryan has been one of the few analysts that has been bullish since the 2022 market lows.
Spyder Trust (SPY)
The Spyder Trust (SPY) formed a doji last week, which is often considered a sign of indecision between the bulls and bears. A close this week below the doji low at $617.87 would trigger a weekly doji sell signal. The rising 20-week EMA at $589.05 is now strong support.
Last week on the NYSE, the A/D ratio was negative, and the S&P 500 Advance/Decline did turn lower. In April, the A/D line moved above the late 2024 high, line b. This signalled that SPY would also eventually move to a new high and above the February high of $613.23. This did occur on June 27th, and SPY has since made a series of new highs. There is good A/D line support at its rising WMA and line b.
In last weeks survey from the American Association of Individual Investors (AAII) , the bullish % declined to 41.4% from 45%. The bearish % rose to 35.6% from the prior week's 33.1%. The AAII Bull-AAII Bear declined to 5.8% but it had reached -40% at the March-May lows. This was an historically low level of bullish sentiment.Spyder Trust With A/D Line
As I have noted in the past, the performance after a Zweig Breath Thrust (ZBT) signal, like the one on April 25th, is also quite impressive. 'Based on 19 signals since the 1940s, the average 6-month return for the S&P 500 after a ZBT signal was 14.8%, while the average 12-month return was 23.4%', according to Investopedia.
The stock market decline from the early December highs, until the positive signals at the end of April, caused many to sell their stock positions. This helped to make the V-shaped rally from the lows even more hated. This is one of those frequent examples of why patience is often essential during many market declines.
The daily S&P 500 A/D line formed a trading range starting in late January. There were several crosses in the A/D line above its WMA, but on April 23rd, a new uptrend was created. This was followed by the ZBT buy signal and move above the resistance, line c, on April 25th. The NYSE Stocks Only and NYSE All A/D line had also moved through their resistance, which was consistent with the end of their correction. Therefore, the weight of the evidence shifted in favor of the market bulls and limits the market risk.
Then, just six days later, the S&P A/D line made a new high as the resistance at line b was overcome. SPY had closed at $566.76, but the new high in the S&P A/D line high projected a move in the SPY above the February high at $613.23. On June 27th, the SPY closed at $614.91.
Invesco QQQ Trust
From the April lows, the Invesco QQQ Trust (QQQ) has outperformed the SPY by about 5% as it had dropped more sharply from the February highs. Last week, QQQ also formed a doji just 10 points below the monthly R1 pivot resistance at $564.30. The doji low was $549.58 with stronger support at $540.81 and the February high, line a,. The 20-week EMA is rising strongly, which is a positive sign and reveals support at $515.49.
The NDX 100 A/D line moved back above its WMA the week of April 25th, line b, which was a sign the correction was over. The following week, the A/D line made a new high that projected a new high in the QQQ. That new high was attained just eight weeks later at the end of June. There was another new high just three weeks ago (line c), and the positive trend shows no signs of a major top.
Many traders and investors have been fighting this rally for the past month. There was a slight increase in the index put/call ratio on Friday reflecting the view of some that a correction was likely. This is also consistent with the weekly doji formations that increases the odds of a pullback.
The positive readings from the A/D lines suggest only a 2-3% pullback at this time and Tuesday's CPI report along with more tariff chaos may be the catalyst. I will be watching the trading in the stock index futures ahead of the report.