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Sincerely,

Frank Bermea
Publisher, Profitable Trading

All major U.S. indices, except for the tech-heavy Nasdaq 100 and Composite, closed in positive territory last week, reversing the previous week’s negative close as the stock market continues its recent pattern of alternating positive and negative weekly closes.

This back-and-forth action indicates investor indecision as the market continues to handicap the probable starting date of the long anticipated Federal Reserve tightening cycle later this year, which may have been pushed back to September following Friday’s not-too-hot, not-too-cold April jobs report.

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From a sector standpoint, last week’s advance was led by financials, health care and consumer staples. My own asset flow-based metric shows that the utilities sector is currently the second most under-invested sector of the S&P 500, following materials, which suggests an emerging value opportunity there.

Technology Dodges Yet Another Bullet

In the April 13 Market Outlook, I said a bullish chart pattern in the market-leading Nasdaq 100 targeted a move to 4,600 that would remain valid as long as underlying support at 4,347 contained the index on the downside.

This support represents the upper boundary of the Nov. 28 investor indecision area. On April 17, and again on May 6, the index tested, held and rebounded from that support, which keeps the 4,600 target intact. A sustained decline below 4,347, however, would negate the upside target and indicate that a significant peak is in place at the index’s recent highs.

For the past couple of months, whenever the stock market appeared to be on the verge of beginning a long overdue corrective decline, minor underlying support levels were tested, new buyers were drawn in, and the larger bullish trend resumed.  

I believe this is largely due to the fact that years of quantitative easing (QE) have trained professional investors to either buy a 5% pullback in the market when given one, or explain to clients later why they didn’t as fresh highs are being made. Although investors apparently haven’t gotten the memo that quantitative easing ended in October, one day the music is going to stop. When it does, the market is going to experience a nasty 10%-plus correction. For now, the “buy the dip” mentality is alive and well, QE or no QE.

Investor Complacency Saves the Market Again

Another key area of my focus recently has been market volatility. A period of sustained investor complacency has been a key component to the broad market’s ability to grind higher since February.  

The next chart shows that the Volatility S&P 500 Index, better known as the VIX or the fear gauge, jumped above its 50-day moving average on Wednesday and Thursday for the first time since February, indicating that investors were finally becoming fearful enough to facilitate a corrective decline.

But the Goldilocks-like April jobs report on Friday quickly extinguished those fears, pushing the VIX back below its 50-day — currently situated at 14.11 — which helped drive stocks sharply higher throughout the day.  

This week, we would need to see a sustained decline below 4,347 in the Nasdaq 100, amid a sustained rise above 14.11 in the VIX, to indicate that a countertrend correction is emerging. Without this, the year’s tenuous market advance is likely to continue.

Oil Prices Meet Initial Upside Target

In the April 20 Market Outlook, I pointed out that the United States Brent Oil ETF (NYSE: BNO) had just broken out from three months of sideways indecision, saying it targeted a nearly 10% advance to $25.50. This target was essentially met on Wednesday as BNO traded as high as $25.30 intraday.

Market Outlook readers know I have been bullish on energy-related assets for most of this year, and from an intermediate-term perspective, it looks like there is more upside in store. For now, however, readers may consider taking some near-term profits on BNO as it has significantly outperformed the S&P 500 over the past three weeks.

The latest investor sentiment and market breadth data now warn of oil’s vulnerability to some corrective backing and filling before another sustainable leg higher begins.

The U.S. stock market once again averted a corrective decline last week, in part thanks to an April employment report that was right in the sweet spot. Investors apparently interpreted it as meaning the Federal Reserve could postpone the beginning of its upcoming rate hiking cycle until the fall, but the market is hardly out of the woods.

Elsewhere, commodity prices are heating up, including copper, crude oil and the broader CRB Index. I view this as an indication that years of near-zero interest rates may finally be triggering some market-based inflation.

This article was originally published on ProfitableTrading.com: Market Rescued Yet Again as Investors Seem to be Forgetting Something​