Weekly Economic and Stock Market Commentary July 26, 2021
As for the stock market specifically:
The markets took the Monday drop as a buying opportunity and came back to finish the week with gains. In fact, the US market averages finished at record-closing highs. As usual, we will take them happily. In a story that seems to have been in effect for a long time, the international markets lagged.
All told, the peak to “trough” declines for the major market averages were modest, and within normal parameters of what one should expect multiple times each year.
However, as I stated last week, fewer stocks are shouldering the load for higher prices. At some point, and that may not occur for months, and it may occur before we know it, fewer stocks supporting higher prices will probably result in lower market averages.
What follows for the next few paragraphs is stock text that I present occasionally.
On the left, I highlighted a bullish chart pattern that I will call a double top break. This is a column of demand that exceeds the previous column of demand. The “signal” occurs when the stock shows demand (buyers) at $35.00.
The blue numbers and letters are used to tell time, 1 for January, 2 for February, etc., with A for October, B for November, and C for December.
On the right, I highlighted a bearish chart pattern that I will call a double bottom break. This is a column of supply that exceeds the previous column of supply. The “signal” occurs when the stock shows supply (sellers) at $38.00.
The blue numbers and letters are used to tell time, 1 for January, 2 for February, etc., with A for October, B for November, and C for December.
About once a quarter I explain the difference between a market capitalization-weighted index, such as the S&P 500, and the “one-stock, one-vote” weighting of the bullish percents. Today is that day.
The discussion comes down to a variation of this: “Why are the bullish percents increasing, but the numbers I see on TV are a little up, flat, or a little down?” Since this is election season, think of the difference in terms of the composition of Congress.
There are two basic answers. One potential answer comes from the nature of the bullish percent. It is based on the notion that a stock as large as General Electric counts as much as a stock of the size of the smallest stock on the NYSE. Think of the bullish percent like the US Senate – California counts as much as South Dakota.
The other potential answer stems from the composition of the index, such as the Dow Jones Industrial Average, S & P 500, or Nasdaq. The S & P 500 and the Nasdaq are known as capitalization-weighted. That means the largest companies in the respective index hold greater influence than the smaller companies. The metaphor here is to the US House of Representatives. There, California has approximately 52 representatives, while South Dakota has 1.
The bullish percent indicators declined for the week, despite the gains in the market averages. The good moves late last week turned short-term indicators higher, and I will evaluate on a client-by-client basis if I should do anything, and what I will do. WEALTH PRESERVATION strategies remain in effect in general.
Remember, Xs mean OFFENSE or wealth accumulation, while Os mean DEFENSE, or wealth preservation.
Below is where our indicators stand as of July 23, 2021 (Courtesy Dorsey, Wright, and Associates).
