Did the IPC report boost new market leaders?

As has been the case in recent months, stock markets were able to survive a series of key economic reports without collapsing. Thursday’s better-than-expected CPI report pushed yields lower and stocks higher, which could create a different environment for the rest of the year.

The data supports the deflationary trend, and the recent spike in jobless claims has convinced many that the economy is slowing. The next major inflation story will be the PCE report on July 26, while the new earnings season will help decide the winners and losers.

Last week’s winner was the iShares Russell 2000 ETF, which rose 6.1% and finally posted a positive year-to-date (YTD) performance. The Dow Jones Utility Average also rose well, up 4.2%, but is only posting a single-digit year-to-date performance.

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The Dow Jones Industrial Average and Dow Jones Transportation Average ($TRAN) both gained 1.6% last week, but the $TRAN index remains negative for the year. The S&P managed a small gain of 0.9% while the NASDAQ 100 index, in response to the CPI report, closed the week down 0.3%. SPDR Gold shares gained 1% with a strong YTD performance of 16.7%

More importantly, on the NYSE Composite, stocks rose four to one as many as fell last week. The Nasdaq Composite's numbers were equally strong, with more stocks hitting new highs than new lows.

Over the past month, several strategists have warned of a potential market decline due to divergences between the S&P 500 and/or NASDAQ 100 unweighted leading decline curves and their unweighted leading decline curves. As I pointed out recently, if you compare the unweighted leading/declining curves to the unweighted S&P or NASDAQ 100 ETFs, you see no divergence.

The NYSE Composite Index rose 2.3% last week, well ahead of the other major averages. The NYSE has reached the upper limit of its trading range, lines a and b. A confirmed bullish breakout suggests at least another 4% gain.

The NYSE Stocks Only Advance/Decline line rose sharply last week, but is still below its May peak. It is still positive as it has held above its rising EMA all year. NYSE All Advance/Decline Line broke above its May high and the resistance of line 4, which constitutes a bullish breakout.

The Spyder Trust (SPY) closed a bit off the highs on Friday as the daily starc+ band was reached. The monthly resistance of the R2 pivot is at $566.71 while the upper boundary of the trading channel (line a) is at $567.73. The SPY closed 1.8% above its 20-day EMA which is at $549.90, so a 2% pullback at this point is unlikely to change its trend.

The S&P 500’s unweighted leading decline line peaked in May and has been making lower highs since then. The downtrend, line b, was broken last week when the A/D line closed above the May peak on Friday. It is quite extended in the short term, so a break or pullback would not be surprising. The weekly S&P A/D line also made a new high, and you will recall that the new June 2023 high projected the new high for the S&P 500 this year.

The NASDAQ 100 and Dow Jones Industrial Advance/Decline charts also hit new highs last week, with only the Russell 2000 Advance/Decline chart lagging.

There were also some important sectoral developments last week, details multi-period DTS analysis revealed new positive WK_DTS signals for the financial sector (XLF), the industrial sector (XLI) as well as the materials sector (XLB).

In particular, the XLB and XLI sectors have corrected from their early April highs and now appear to have completed their corrections. This is a sign to me that these more value-oriented sectors are now ready to do their part to drive the broader stock market higher. The most interest rate-sensitive sectors, Real Estate Select (XLRE) and Utility Sector (XLU), both gained over 4% last week.

In summary, last week’s action suggests that the market is poised to move higher as more stocks and ETFs are now exhibiting positive technical patterns in terms of volume and RS analysis. Once the advance/decline lines start to move higher, the long-term risk in the market should decrease significantly. The tragic events of the weekend are likely to create a level of uncertainty for equity investors in the week ahead.