Should The Bulls Be Nervous?

The S&P 500 experienced a volatile week, declining 2.6% after an initial rally, with transportation and small-cap stocks underperforming significantly year-to-date; however, a historically accurate Zweig Breadth Thrust signal from April remains bullish for the intermediate term, and positive sentiment indicators persist despite rising interest rates and a poor reaction to the 20-year T-Bond auction triggering Wednesday's selloff. Gold shares (GLD) bucked the trend, rising 5.3% for the week and 27.9% YTD, signaling a potential completion of its corrective pattern with upside Fibonacci targets at $324.46 and $333.34.

Analysis

The S&P 500 experienced notable volatility, opening at 5903 and rallying before closing the week at 5802, 2.8% below its highs and representing a 2.6% weekly decline. This downturn was characterized by broad selling, particularly on Wednesday when at least 90% of S&P 500 and Nasdaq 100 stocks fell, and an increase in Put/Call ratios above 1.00 signaled rising trader apprehension. Underperforming sectors included the Dow Jones Transportation Average, down 4.1% for the week and 8.6% year-to-date, and the iShares Russell 2000, which fell 3.5% weekly and 8.1% YTD. Despite these declines, a bullish Zweig Breadth Thrust (ZBT) signal from April 24th, historically 100% accurate for 6- and 12-month S&P 500 gains, underpins a positive intermediate-term outlook. The Spyder Trust (SPY) closed above its rising 20-week EMA at $569.08 and neared its 20-day EMA at $574.42, a potential support level. Investor sentiment, per the AAII survey, showed a slight bullish edge (37.7% bullish vs. 36.7% bearish), a notable shift from deeper pessimism observed weeks prior. The Invesco QQQ Trust (QQQ) demonstrated strength, gaining 7.1% in May and outperforming SPY's 4.4% rise, with its Advance/Decline line suggesting further upside potential. Conversely, Spyder Gold Shares (GLD) surged 5.3% for the week, reaching 27.9% YTD growth, with technical analysis indicating a completed corrective pattern and upside Fibonacci targets at $324.46 and $333.34. A primary headwind emerges from rising interest rates, underscored by a poor 20-year T-Bond auction and the 30-year T-Bond yield closing above 4.975% resistance, with a potential target of 5.60%; confirmation of this breakout would be sought if the 10-year T-Note yield surpasses 4.840%.

Key Decisions for Investors

• Investors should acknowledge the recent market pullback and increased Put/Call ratios as signs of near-term caution, but weigh this against the historically reliable bullish Zweig Breadth Thrust signal which suggests a positive outlook for equities over the next 6-12 months.
• Consider tactical allocations towards outperforming assets like the Nasdaq 100 (QQQ), given its strong momentum and positive A/D line signals, and Gold (GLD), which exhibits a bullish technical setup with defined upside targets, while employing risk management strategies such as stop-loss orders, particularly if buying into dips near key moving averages like the 20-day EMA.
• Maintain a vigilant watch on interest rate movements, especially the 30-year T-Bond yield's progression towards the 5.60% target and the 10-year T-Note yield potentially breaching 4.840%, as sustained increases in yields could significantly dampen stock market performance and sentiment.