David Settle, a co-founder of Market Scholars, has given us his most recent outlook on the market and what he sees going forward. If you follow David (or his partner Brandon Van Zee) on Twitter, you may be familiar with their intermediate- to longer-term approach to analyzing markets. David begins by noting that, for the most part, the major indices all appear similar to one another, in that we are seeing a “strengthening bullish intermediate posture with overbought short-term sentiment” that may show some weakness at some point this week. He also brings to our attention that while Small-Caps have been underperforming as of late (bringing us to its worst relative level in over three years), “the Russell’s intermediate line still has not crossed above the chart’s midpoint yet. In 2016, this pattern led to a strong two years of relative gain in small caps as the U.S. dollar declined.”
Looking at the recent rally in equities, using their proprietary indicators, David mentions that the intermediate-term trend has swung higher and is now back above 50. However, while price is above the six-week moving average, that moving average is still declining. David thinks there should be a near-term correction like we saw in late December.
David also brings to our attention that we are above both the 50-day and 200-day Moving Averages, which is bullish. We also saw a bullish “transition” candle on the Heiken Ashi chart, which is another positive development.
Over the near-term, David is expecting a pullback on the S&P 500 into the 8-day moving average before a run higher. This would bring the index below 2850. In fact, a “perfectly normal” 38.2% retracement would bring it to 2836 on the S&P 500.
David believes that getting above 290 (and more so the 293 level) on $SPY will be the key for a continued rally. This is when “the train will leave the station”, according to his views on the Volume Profile.
David does believe that once we fill the gap from Monday’s higher open, then a more normalized rally across all the market indices can begin. Of course, he doesn’t think we will take off like a rocket but sees it as more of a typical, intermediate run of 1 to 3 months.
“The abnormal intermediate runs that last longer than expected, lead to pullbacks that are a lot more uncomfortable. As we recently saw, a four-month run gave us a pullback that a lot of people were bringing up bear market calls, recession calls. And we didn’t even have a 38% retracement.”
What about overseas? According to David, we have seen some of the smaller areas in the Emerging Market space put in decent moves. He notes that developed markets such as France, the United Kingdom, and Germany are looking good as well. Brazil and Russia also have bullish trends.
On a day-to-day basis, while we have had a nice winning streak, David does not expect this to last too much longer. With this being said, he certainly feels that a long(er)-term rally is beginning to set up, looking out over the remainder of the Summer months. He also touches on Treasuries and interest rates in this video. He expects a bounce to 2.04% on the 10-year Treasury yield. David also sees more pressure on the US Dollar ($DXY), especially considering the odds of a rate cut. Further, he reminds us that rate cut environments are typically bullish for stocks.