S&P 500 breakout but no buy signal

Summary

• The S&P 500 and Nasdaq reached new highs, but the Dow has not yet confirmed the breakout
• Liquidity is strong, and long-term Treasury yields are softening
• But the Conference Board Leading Economic Index warns of a recession
• The dollar keeps falling, and demand for gold remains strong, flagging high levels of uncertainty

---

The S&P 500 broke resistance at 6100 to reach a new high. Expect retracement to test the new support level, but respect will likely signal a fresh advance.

The Nasdaq 100 ETF (QQQ) has also reached a new high.

However, the Dow Jones Industrial Average lags and has not yet confirmed the new breakout.

The broad Dow Jones US Index (DJUS) still lags the DJ World-x-US Index (W2DOW).

Financial Markets

The Chicago Fed National Financial Conditions Index declined to -0.51 on June 20, signaling improving financial conditions.

10-year Treasury yields declined to 4.25%, providing further support for stocks.

Economy

The Conference Board’s leading economic index (LEI) declined to 99.0% in May. Six-month growth in the LEI (blue) fell to an annualized -5.4%, below the -4.1% that triggers a recession signal (marked in red).

The black line on the above chart indicates negative growth in more than 50% of the LEI components over the past six months, which confirms the recession signal.

Manufacturers’ new orders, excluding defense and aircraft, are one of the few LEI components that did not decline over the past 6 months. However, they show a steep long-term downtrend when adjusted for inflation (PPI for capital goods).

New orders for consumer goods, adjusted by CPI, are also declining.

Dollar & Gold

The dollar continues to weaken, with the US Dollar Index breaking support at 98 to confirm our target of 90.

Gold is consolidating between $3,200 and $3,400 per ounce. Declining Trend Index peaks warn of secondary selling pressure, and another test of support at $3,200 is likely. Respect of support would signal another test of resistance at $3,500.

Silver is consolidating in a narrow pennant at $36 per ounce. A retracement to test the new support level at $34 remains likely, but follow-through above $37 would signal another advance.

Conclusion

A breakout of the Dow Jones Industrial Average above 45K would signal another advance for stocks, but the Conference Board Leading Economic Index warns of a recession. Manufacturers’ new orders for non-defense capital goods and consumer goods both display long-term weakness.

10-year Treasury yields softened to 4.25%, and financial conditions are easing, supporting stock prices. However, a declining dollar and strong gold price continue to warn of uncertainty. We don’t see this as a buy opportunity for investors; extreme stock valuation levels continue to warn of elevated risk of a significant drawdown.

Acknowledgments

• Federal Reserve of St Louis: FRED Data
• The Conference Board: Leading Economic Index