Indices Clear June 2022 High

Where is the DOW today?

June 2022 highs have now been exceeded and the markets are now testing their 200 day moving averages.

Chart 1 shows the Dow trading at their highest level in three months and headed toward the 200-day average (see the red line). A test of the red resistance line would also coincide with a test of a falling trendline drawn over January 2022 and April 2022 highs (see the blue arrow).

It appears that the Dow would have to clear both resistance lines to signal that the current rally is more than just a rebound in an ongoing downtrend.

Chart 1

Chart 2

Chart 2 shows the S&P 500 making similar moves.

Daily MACD lines in the lower box have risen to the highest level in more than one year, which is normally a bullish sign. The14-day RSI line in the upper box, however, is crossing into overbought territory (over 70). This would suggest that the current rally is beginning to looked stretched to the upside.

Both stock indexes have also recovered more than half of their 2022 losses. As with the Dow, the major trend of the SPX is still down. The SPX would also have to clear its red and blue resistance lines to reverse that major downtrend.

What about the Nasdaq?

The Nasdaq continues to test resistance. Chart 3 shows the Nasdaq Index having cleared that barrier, which suggests a further push to its 200-day average. The flat red lines show Fibonnaci bands retracing the yearlong decline, which may also provide overhead resistance. Notice that the 50% retracement level (the middle line) coincides closely with the 200-day average (the red line). A decisive move above its 200-day line is necessary to signal a more substantial rally.

Chart 3

Bull or Bear Market Rally?

The question everyone is trying to answer now is whether the rally that started in June is still part of a downtrend or the start of a new bull market.

I remain in the conservative, albeit negative camp.

A modest decline in inflation reports this week potentially supports the view that we are seeing a peak. Further, a pullback in commodity prices and bond yields also supports that view.

As a caveat, however, both of those trends, may be suggesting a slowing in the economy which isn’t good for stocks. The inverted yield curve, which usually signals recessionary conditions, remains a concern.

Although banks remain well capitalized, the inversion we see in yields will erode net interest margins and curb lending, while this year’s stock market decline will require them to divert more cash towards stabilizing their balance sheets.

225 bps of rate hikes with more to come as the Fed battles to bring inflation to its 2% target has lifted the two-year yield almost 50 bps above the 10-year yield.

All things equal, the economic impact of banks reducing credit to business and households can only be negative.

The above charts suggest that the continuation of the market’s 2022 downtrend is about to be tested.