The unrelenting hawkish messages from the Fed coupled with a strong ADP employment report caused the market to selloff last Thursday and Friday.  The 10-year treasury yield closed at 4.05% last Friday, the highest close since early March 2023.  The cyclical sectors in the stock market have not been affected by the higher rates yet, meaning the higher yield hasn’t caused the stock market valuation to go down yet.  Normally, when the 10-year treasury yield goes up too high, the stock market will react to the downside.  So the little reaction in the last two trading days is not enough to determine the direction of the stock market trend yet.

On the DOW daily chart, a double top will be confirmed if it can trade and stay below its 50-day moving average.  The S&P 500 and NASDAQ daily charts are stronger than the DOW and their perspective double top formation has a little more work to do, meaning the price level has to come down more to confirm the double top.

If the DOW can confirm the double top in the next few days, the S&P 500 and NASDAQ will come down to meet the DOW.  The S&P 500 and NASDAQ can’t fly away while the DOW is anchoring down.

The Q2 earnings season starts next week with the big banks.  The big banks haven’t led the market for a long time, so we are not expecting the big banks earnings report to kick off a new rally.  If anything, the market downside risk is much greater with the big banks because they will reveal the weakness in the real economy.

We are officially entering sloppy summer trading session with the start of Q2 earnings report season.  We think the stock market is rich at the present levels and the risk reward to open new positions is not in our favor.  So we will continue to sell covered calls with our existing positions.  We blogged last week that the AI stocks have already topped and we still believe so.  The excitement with AI has to be matched with earnings.  We don’t believe AI will contribute significantly to the Q2 earnings with the exception of Nvidia.  Most of the AI companies will not have significant AI earnings. AI is still at the hype stage.  Real winners in AI will be determined in the next 4-year cycle.  Remember we are currently at the last leg of the 4-year cycle that started in March 2020.

Below is the DOW daily chart.

The DOW closed just a little bit above its 50-day moving average last Friday.  If it can take out the 06/26/2023 low in the next few days to confirm the double top, the S&P 500 and NASDAQ will come down to meet the DOW.

We will be watching the DOW closely.  This double top confirmation could start the weekly cycle correction phase with the potential to last all the way into October.  We will see.