Did The CPI Report Boost The New Market Leaders?

As has been the case for the past few months the stock market was able to survive a series of key economic reports without collapsing. The better-than-expected CPI report on Thursday pushed yields lower and stocks higher which could create a different environment for the rest of the year.

The data supports the view of a deflationary trend and the recent rise in unemployment claims has convinced many that the economy is now slowing. The next big data point for inflation is the PCE Report on July 26 while the new earnings season will help separate the winners and losers.

The performance winner last week was the iShares Russell 2000 ETF as it was up 6.1% and finally showed positive year-to-date performance (YTD). The Dow Jones Utility Average also did well up 4.2% but only shows single-digit YTD performance.

The Dow Jones Industrial Average as well as the Dow Jones Transportation Average ($TRAN) rose 1.6% last week but $TRAN is still negative for the year. The S&P managed to record a small gain of 0.9% while the NASDAQ 100 index in reaction to the CPI report closed the week down 0.3%. The SPDR Gold Shares were up 1% with a solid YTD performance of 16.7%

More importantly on the NYSE Composite, there were over four times as many advancing stocks as declining stocks last week. The numbers on the Nasdaq Composite were equally strong with more stocks making New Highs than New Lows.

Over the past month, several strategists have been warning about a potential market decline based on the divergences between the weighted S&P 500 and or the weighted NASDAQ 100 and their unweighted advanced decline lines. As I pointed out recently if you compare the unweighted Advance/Decline lines to the unweighted S&P or NASDAQ 100 ETFs there were no divergence.

The NYSE Composite was up 2.3% last week far better than the other major averages. The NYSE has reached the upper boundary of its trading range, lines a and b. A confirmed upside breakout projects at least another 4% rally.

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. The NYSE All Advance/Decline line has pushed above its May high and the resistance at line 4 which is a bullish breakout.

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

The unweighted S&P 500 advanced decline line peaked in May and has formed lower highs since then. The downtrend, line b, was broken last week as the A/D line closed Friday above the May peak. It is quite extended on a near-term basis so a pause or pullback would not be surprising. The weekly S&P A/D line also made a new high and you will recall the new high in June of 2023 projected the new high in the S&P 500 this year.

The NASDAQ 100 Advance/Decline and the Dow Jones Industrial Advance/Decline lines both also made new highs last week with only the Russell 2000 Advance/Decline line lagging.

There were also some important sector developments last week the detailed multi-time frame 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, XLB and XLI had been correcting since the early April peaks 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 in moving the overall stock market higher. The more interest rate-sensitive sectors, the Real Estate Select (XLRE) and the Utility Sector (XLU) both rose over 4% last week.

In summary, the action last week suggests that the market is ready to move higher as more stocks and ETFs are now showing positive technical patterns in terms of volume and RS analysis. Once the Advance/Decline lines start to trend higher the risk on the long side of the market should decrease significantly. The tragic events over the weekend are likely to create a level of uncertainty for stock investors in the week ahead.