Before we get to the stock market, we’d like to pay our respect and honor the 1.1 million US war dead who made the ultimate sacrifice for their country since the Revolutionary War. We remember them this Memorial Day.
Last week we noticed something different about the way the NASDAQ performed. During the previous seven weeks, the index would selloff, pop higher for a day or two, then proceed to walk down the stairs to set a new, markedly lower low.
Like Meatloaf, we got two out of three, the rally, a selloff, but prices remained in the same zip code and didn’t crater. Then, the NASDAQ rallied hard on Thursday and Friday to close out the week between resistance between 12,000 and 12,500.
A positive came out of Friday’s action, the NASDAQ closed above its descending trendline that restrained trading since the beginning of April. While that is a plus, it doesn’t necessarily mean the worst for stocks is over. There was a similar trend break in the middle of May that lasted for about two weeks before the NASDAQ tumbled.
Like last time, we expect the NASDAQ to rally, perhaps to as much as its 50-day moving average of 12,919. Stocks going up is a relief; however, it is the next wave of selling that we are looking forward to seeing. It’s what will determine if a new uptrend has begun or if this is just another suckers’ rally.
A suckers’ rally is when the sharks on Wall Street lure in buyers with the belief the worst is over. They use the positive vibe to sell stock into rising prices and then hammer the markets lower.
For now, we are cautiously optimistic about stocks in the very short-term as it’s moved from a sellers’ market to a traders’ market. The next downswing will determine if we return to a sellers’ market or groove on into a new buyers’ market. Like last week, we don’t recommend selling into the rally as we had for the previous month and a half.
It was a strong week for retail stocks last week but, to us, the consumer appears to be on shaky ground. Here is why. Higher end retailers are doing well. That’s not surprising as wealthier people tend to own assets like stocks, real estate, commodities… their wealth can actually increase during inflationary times.
For us, it’s the middle class that is waving the yellow flag. Middle class retailers like Target and Walmart recently reported that their customers are buying fewer items. Meanwhile, discount retailers like Dollar General report rising sales.
Connecting the dots… in our view, that means some consumers are shifting away from stores like Target to discounters like Dollar General. From our experience, that’s almost always a sign of economic distress.
It’s also important to note that consumerism is a lagging indicator because jobs are a lagging indicator. As long as people are working and feel secure in their jobs, they will spend. Keep an eye on unemployment claims. If those numbers start to rise noticeably, the economy could be headed for trouble, which would likely take stock prices lower too.
Once we get a reversal confirmation, we will start adding stocks here again. Until then, we’ll continue to be patient.