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Last week, the major U.S. stock indices recovered the previous week's losses and then some, led higher by the small-cap Russell 2000, which gained 3.1%. However, the Russell and the tech-heavy Nasdaq 100, the other perennial market leader, are still in negative territory for 2016.
Moreover, most of the indices are currently challenging major overhead resistance levels. These levels are likely critical inflection points from which their next significant moves will begin, so I'll talk about them in greater detail later in the report.
Financials were last week's best-performing sector. Asbury Research's proprietary ETF asset flows-based metric shows this strength was fueled by a big one-week expansion in investor assets, which jumped to 17.4% of all ETF-related bets from 16.8% the previous week.
However, also note that the biggest outflows over the past one-month and three-month periods came from financials. Technically, this is an intermediate-term negative for the sector, but it simply suggests that it will take more than a week of positive asset flows to reverse the trend of relative underperformance in financials that has been in effect since August.
The takeaway: Be careful about getting lured into an overweight position in financials just yet.
Risk/Reward Does Not Favor Bulls at Major Resistance
In last week's Market Outlook, I said the S&P 500 was closing in on formidable overhead resistance at 2,082 with signs pointing to a pullback of some significance before it was meaningfully broken.
For starters, momentum had reached a positive extreme that coincided with previous multiweek peaks in the index. Additionally, based on almost 60 years of seasonality data, the third full week of April (i.e., this week) is the strongest of the quarter, after which the index has struggled until mid-June.
Meanwhile, the PHLX Semiconductor (SOX) index is simultaneously testing a major resistance area at 682 to 693, finishing last week at 673. This resistance represents the highs from Dec. 29, Dec. 3 and Oct. 23.
Since the semiconductor group tends to lead the technology sector, which, in turn, tends to lead the broader market, keep an especially close eye on SOX this week. It could be a leading indication of how the stock market will resolve this important decision point.
Another reason for longs to be cautious this week is investor sentiment, which has become exceedingly bullish.
A daily survey of retail futures traders' bullishness on the S&P 500 has reached 81%. Similar extremes coincided with three important peaks in the index since 2014.
Taken together, these factors suggest that, from a risk/reward standpoint, this is a particularly treacherous place to initiate long positions in the stock market. It would be prudent to wait until these resistance levels are broken to the upside or for a healthy correction to occur before putting new money to work.
Interest Rates Still Headed Lower
Last week, I pointed out that the yield on the U.S. 10-year Treasury note had declined into a band of support at 1.71% to 1.63%. I said this was a major inflection point from which the next meaningful move in long-term U.S. interest rates was likely to begin -- either back up to 1.85% or down to the 1.43% July 2012 lows.
As you can see, yields stopped on a dime at 1.70% on April 7, as expected, before rebounding back to 1.80% on April 14. This sets the stage for more near-term strength and a move to at least 1.85%.
Bigger picture, however, the chart pattern in the iShares 7-10 Year Treasury Bond (NYSE: IEF), which I covered in the March 7 Market Outlook, continues to target a move to $114, which is 3% above Friday's close. This suggests that, minor rebounds aside, long-term interest rates are still headed lower this quarter, perhaps to the 1.55% to 1.51% area.
Doha Meeting Bad News for Oil Prices?
In what may be the most influential piece of economic news this week, delegates from more than a dozen oil-producing countries who gathered in Doha, Qatar this weekend were unable to reach an agreement on freezing crude oil output. This calls the sustainability of oil's recent rally into question, and with it, the current advance in the positively correlated S&P 500.
Spot WTI crude oil finished last week at $40.40 per barrel, just below formidable overhead resistance at $41.02 to $44.53, which represents the 200-day moving average and the closing lows of January and March 2015.
It would take a sustained rise above this level to confirm that oil prices have bottomed and that a new bullish trend is beginning. Below it, however, the current bearish trend remains intact and is likely to resume.
Putting It All Together
A number of influential stock indices, including the S&P 500 and PHLX Semiconductor, began the week just below formidable overhead resistance levels. What's more, they did so amid historically frothy momentum, extreme bullish investor sentiment and an almost 60-year tendency for the S&P 500 to peak for the entire second quarter this week.
So, from a risk/reward standpoint, this is probably not a good spot for investors to put new money to work.
The wild card this week will be oil. If crude prices tumble, the S&P 500 could go with them.
As I'm sure you are all aware, stock prices have been unusually volatile lately...