The Market Mosaic 6.25.23

Stocks working off overbought conditions.

Jun 25, 2023

Welcome back to The Market Mosaic, where I gauge the stock market’s next move by looking at macro, technicals, and market internals. I’ll also highlight trade ideas using this analysis.

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And be sure to check out Mosaic Chart Alerts. It’s a midweek update covering chart setups among long and short ideas in the stock market, along with levels I’m watching.

Now for this week’s issue…

As I mentioned a couple weeks ago, I have a few trips planned this summer with my family. So I won’t always have time for my usual Sunday post.

But I still want to provide a quick update on what I’m watching…just in a more condensed format.

So instead of my normal distillation of the past week’s events impacting the economy and stock market outlook, I have a quick summary and links to recent posts that remain impactful for what happens next in the market (plus a few more trade ideas at the end).

Big Picture

First, my key takeaway this week is that stocks are working off overbought conditions while investor sentiment remains excessively bullish.

Given the recent breadth expansion, this has become a more constructive trading environment, but stocks could use a breather. After a strong breakout over the 4200 level, the S&P 500 has become overbought on the MACD and RSI that you can see below.

At the same time, a more pronounced divergence is emerging with the percent of stocks trading above their 20-day moving average (MA). The average stock is seeing a quick pullback below short-term MAs, with this measure now down to 45%.

I would also feel much better if net new highs could stay in positive territory, but last last week we’re seeing the emergence of net new lows again. I don’t want to see this trend persist below zero!

But overall, we’ve seen a decent recovery in the percent of stocks above their 50-day MA. This was a marked change from the start of June, and shows how quickly many stocks caught up to the major indexes during the breakout over 4200 on the S&P 500.

Bullish sentiment also remains excessive. AAII bulls are at 43%, which is a huge jump from the end of May and is higher than the historical average. If stocks keep pulling back, it will be interesting to see if bulls drop much in this week’s update.

The last chart I want to share here is with the Conference Board’s Leading Economic Index (LEI). The bad news is that the year-over-year rate of change remains deeply negative. The good news is that stocks do extremely well historically when the rate of change starts improving off a negative level. This week’s update saw a small improvement in the rate of change.

Mosaic Tidbits

Here are a few recent posts that are still impactful and relevant to the stock market’s next move:

I discuss several catalysts here that can keep the rally going, including why low VIX levels can be a good thing (ignore the one about sentiment…it’s no longer valid).
If a new bull market is to persist, then a recovery in corporate profits is badly needed. Here are a few positive signs on the earnings front.
A quick refresher on how I use the relative strength line to select and time trade ideas (look at the DINO chart analysis in the section).
Plus trade ideas I’m watching from the most recent Mosaic Chart Alerts post.

Chart Updates

As I wrap up my weekly scans, here are a few extra trade ideas that I’m monitoring.

INSP

Idea from the long watchlist a few weeks ago that broke out. Setting up another entry point with stock basing and MACD reset at zero.

CVLG

Transport stock creating an ascending triangle pattern. Could also be a “base on a base”. Watching for a move over $43.

GPI

Trading in a tight range following a breakout over $240, which was part of larger consolidation area going back to February.

That’s all for now! This week will feature more comments from Federal Reserve chair Jerome Powell, as well as an updated look at the Fed’s preferred inflation gauge with PCE. This week will also wrap up calendar second quarter, with the next batch of quarterly earnings reports due soon.

I hope you’ve enjoyed The Market Mosaic, and please share this report with your family and friends…or anyone that would benefit from an objective look at the stock market.

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For updated charts, market analysis, and other trade ideas, give me a follow on Twitter: @mosaicassetco

And if you have any questions or feedback, feel free to shoot me an email at mosaicassetco@gmail.com

Disclaimer: these are not recommendations and just my thoughts and opinions…do your own due diligence! I may hold a position in the securities mentioned in this report.

The Market Mosaic