It has been eight weeks since the March 23 low. The Dow and S&P 500 both are under its 200-day moving average. Nasdaq has been above the 200-day moving average since April 22nd. This divergence is reflecting the difference between the digital and real economy. The digital economy stocks continue to perform because the Covid-19 health crisis didn’t hurt, but actually helped to generate more revenue under the lock down.
While the S&P 500 cash index literally kept at the same level on closing basis in the last two weeks, there were many different types of stocks taking turns to make the top. For example, the best performing health stock Abbott Labs (ABT ticker) topped on 4/20/2020 during the height of the health crisis. Last week the regional casino stock such as Penn National Gaming (PENN ticker) has a great week. PENN stock’s mini bubble styled running in the last five days reminded us how many second tier stocks ran from 2/3/2020-2/19/2020, right before the crash in February. In other words, before an impending stock market top, the speculative stocks such as PENN will run wild to suck people in. Based on the behavior of the speculative stocks and historical timing model, we believe this rally is on borrowed time. There will be a correction starting in the next 2 weeks.
On the S&P 500 daily chart below, we marked the daily cycle count. The first daily cycle ran from 3/23-4/21/2020. The second daily cycle ran from 4/21-5/14/2020. The third daily cycle started on 5/15/2020 and now it is 6th days into the cycle. The weekly cycle started in March 23, it has been 8 weeks already. Historically 9-week is the typical time length for a bear market rally. So the next two weeks are important for the market to declare its true color. If the market turns down in the next two weeks, we shall see the correction to touch 2400-2600 level. If the market is able to drag through June without a correction, then it’s a different story. Right now the expectations are for a correction in June. We will send out alerts when the signal is confirmed.
Last week we recommended KPTI stock. The stock performed well last week after hitting 150-day moving average. The daily cycle has turned and the catalysts in the next 30 days should drive it higher. We normally don’t recommend stocks during the general market topping phase. We believe KPTI is a special situation stock and will be able to rise against the general market correction. We have read available information from the company website and we believe it has the potential to become a blockbuster cancer drug pharmaceutical company. We will hold the stock for the next 1-2 years if not longer.