Eight-week losing streak for the Dow keeps weekly technicals tested

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The S&P 500 briefly slid into bear market territory and captured the headlines. Earnings disappointed and pointed to further worries regarding the US consumer market which rose in retail purchases (largely in nominal terms) but coincided with a spike in consumer credit. his sudden move riased fears that it's sustainability can’t go far.

Over in the bond market, US yields finished the week lower for most of the curve. In real terms, the seven-year and above were still in positive territory as was the case at the start of last week. Inflation expectations dropped with the five-year below 3% and the ten-year beneath 2.6% signifying the lack of a need for larger rate hikes.

Markets are still fully pricing in a 50-basis point (bp) rate hike out of the US Federal Reserve (Fed) for both June and July while hardly pricing that size in for September.

Central bank speak was a bit of a worry as usual attempts to aid the stock market when in retreat waren't on display with the Fed’s George saying the central bank was looking to ensure “transmission of our policy through markets’ understanding that tightening should be expected”, and that even if a stock market drop wasn’t the target, “it is one of the avenues through which tighter financial conditions would emerge.”

What little was on offer in terms of US economic data was largely a disappointment. According to the Philly Fed, manufacturing is at its lowest in nearly two years and not far off contraction with a 2.6 reading. Unemployment claims are worse than expected for the sixth week in a row, and existing home sales plummeted to lows unseen since mid-2020 at 5.61m.

As for the week ahead, it’s relatively quiet out of the US today but will pick up tomorrow with preliminary manufacturing and services PMIs (Purchasing Managers Index). The readings are expected to drop but remain in expansionary above-50 territory giving the impression we’re not at a turning point yet in terms of economic activity. Pricing data on Friday out of the US preceded by preliminary GDP (Gross Domestic Product) on Thursday are two items that will be closely watched given the importance of the former to the central bank and the latter’s contraction in the advance reading released at the end of last month. Otherwise, there’s more housing data, durables, and Friday’s insight into spending, income, and consumer sentiment.

Despite the lower weekly finish, the moves late last week gave contrarian buy-on-reversal an opportunity. With follow-through on Friday going past its daily 2nd Support level before retracing back up, in all keeping the technical overview a stalling bear trend in both daily and weekly time frames.

Component performance by Friday's close saw Cisco and Salesforce outperform by a decent margin, though there were plenty suffering in the red with Boeing and Caterpillar losing out most. US sector performance showed health and real estate outperform, while on the other end consumer discretionary was hit hardest.

IG client* and CoT** sentiment for the Dow

Dow chart with retail and institutional sentiment

As for sentiment amongst the big boys, it's still heavy sell though with an increase in longs by 658 lots not far off the 823 lot rise in shorts has caused the percentage to drop a notch to 72%. For the remaining key US indices they are also heavy sell Russell 2000 (72%), while majority buy S&P 500 (55%) and Nasdaq 100 (56%).

Retail trader bias is an almost exact opposite heavy buy 74%, with further price drops enticing shorts into closing out.

*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.
**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.