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G’day Blokes and Sheilas,

Musk here! The latest edition of The Musk Report is here. Scroll straight to the bottom if you want the slide deck with every chart that has gone into this weeks analysis. I have also added an explainer doc just so anyone reading this understands the logic behind my process, and the context behind the data.

Let’s dive in…

Last week's forecast held up well.

Three of the four sectors expected to move higher finished the week in positive territory, led by Healthcare, which surged 9.21% and was the week's standout sector. There would have been some very handy opportunities for traders focusing their scans on Healthcare during the week.

The watchlist also did its job. Materials and Oil both confirmed bullish and moved strongly higher, gaining 5.61% and 6.25% respectively. Readers of this report would’ve been ready and waiting for the trigger to go long on materials and energy.

The avoid bucket was similarly effective. Consumer Discretionary fell 6.55%, Property dropped 4.34% and Industrials lost 2.1%, vindicating our decision to leave those alone. The glaring miss was Precious Metals, which continued their strong run and added substantially to the previous week's gains.

The market initially behaved as expected and precious metals did actually sell off early in the week. That was until a dovish mid-week Fed speech changed the complexion of the entire market. In last week's report I argued that equities and commodities likely needed another material improvement in liquidity conditions to fuel the next leg higher.

On Wednesday, the market got exactly that catalyst.

Investors interpreted the Fed's comments as dovish; bond yields and the US dollar fell sharply as the threat of rate hikes disappear; liquidity improves; metals and equities rally. And crucially, that momentum persisted through the remainder of the week.

US markets remain broadly bullish, but the picture underneath is becoming less convincing.

The S&P 500, RSP and Dow remain in uptrends, with SPX now approaching an important support zone. The Nasdaq is also sitting at key support and could confirm a return to bullish structure if it pivots here.

The main concern is confirmation. Russell 2000 has slipped back below its breakout level and made a lower low, while the Dow is showing bearish divergence and has failed to hold its breakout. Transports remain sideways.

So the base case remains for the major indices to bounce this week, but breadth and confirmation are weaker than I would like. A bounce that produces lower highs in RUT or DJI would be an important warning sign.

Featured Charts

S&P 500

Dow Jones Industrial

Russell 2000

The All Ords and ASX 200 pulled back last week, but both are still holding bullish structure and now look positioned for a move back towards resistance.

More importantly, equal-weight and small caps are behaving relatively well. XEW has confirmed a higher low after successfully flipping resistance into support, while XSO is sitting right on the verge of confirming a bullish breakout.

That divergence matters. The large-cap indices softened, but participation underneath them has held up reasonably well. Probably a reflection of a really tough week for banks who make up a huge part of the broader market.

Featured Charts

ASX 200 Equal-Weight

Emerging Companies

Liquidity conditions are supportive and still improving.

The DXY remains in a clear downtrend and looks likely to move lower again, while the US 2-year yield is also expected to continue its corrective move down before finding support. Both are supportive for risk assets by easing financial conditions.

The VIX is no longer falling cleanly, but it looks to be moving sideways rather than setting up for a spike. Australian 2-year yields remain sideways and largely neutral.

Most importantly, markets are still preferring high risk debt over safer government bonds (as inferred from a rising HYG/IEF ratio chart). When that relationship flips, it is said to be the first warning signs that credit is drying up and investors are becoming wary of risk. For now, those warning signs are not present.

Overall, the tap still looks on. Liquidity is not perfect, but there is enough support here to give the markets a reason to rally.

Featured Charts

US Dollar Index

Risk appetite is improving, but not yet fully risk-on.

SPHB/SPLV (High-Beta stocks vs Low Volatility stocks) and XSO/XJO (riskier small caps vs safer large caps) are both pushing higher, showing investors are becoming more willing to favour higher-risk assets. The small-cap ratio in particular continues to improve despite technically remaining in bearish structure.

The main weak spot is NDX/SPX (Nasdaq vs SP500), which has rejected resistance and remains bearish, although relatively resilient OBV suggest the decline may be losing conviction and the recent rally may be more than just a dead cat bounce. Gold/DJI has also pushed higher, favouring defensives, but a pullback now looks possible.

Featured Charts

Aussie Small Caps vs Top 200

Gold vs Dow Jones Industrial

The clearest feature this week is rotation, not broad-based strength. But there are still plenty of spaces to live in. Materials is the standout. It is sitting right underneath all-time-high resistance and still looks healthy. A clean breakout would make the sector one of the strongest areas of the market. Energy and Healthcare also remain bullish. Energy appears to have finished its recent pullback and resumed its uptrend, while Healthcare continues to push higher, although it is now approaching some fairly significant resistance. Utilities remain healthy, but may be due for a short-term pause before continuing higher.

At the other end of the market, Financials are rolling over again, confirming why the recent rally was treated as a short-term opportunity rather than a new sustained trend. Property remains firmly bearish, while Telcos also look vulnerable to further downside. Consumer Staples are still technically in an uptrend, but momentum has deteriorated enough that I expect some weakness this week.

Overall, the areas I would be most interested in hunting for long setups are Materials, Energy, Healthcare and Utilities, while Financials, Property and Telcos remain areas I would generally avoid.

Featured Charts

Materials - (All hail King Material!)

Energy

Healthcare

Utilities

The commodity picture remains bullish overall, but several of the strongest markets now look stretched in the short term.

Gold and Silver have both surged strongly, but both are now showing signs that a correction is due. Gol still looks structurally healthy and any pullback should be viewed as a potential reset within the broader uptrend, while Silver looks even more vulnerable after completing a strong five-wave advance into major resistance.

Copper is improving again, having bounced from support and turned bullish, but it still needs to clear major resistance to prove the move has real staying power. Uranium looks the most attractive setup this week. It has bounced from support, momentum is improving and volume behaviour is leading price in a positive way. A clean push higher would confirm the bullish shift.

Oil remains bullish, but like Gold and Silver, it is starting to show signs of exhaustion and may need to pull back before the next leg higher.

Charts

Silver

Silver - Zoomed In

Copper

Oil

Gold

Uranium

The broad market backdrop remains positive, with both US and Australian indices still bullish. US confirmation is a little patchy, but improving liquidity conditions i.e. falling DXY and yields, alongside healthy credit markets, are providing support.

Risk appetite is also improving, although it hasn't fully shifted back into a strong risk-on regime yet.

Actionable takeaway: keep looking for longs, but look in the right places. Areas already showing strength are Materials, Energy, Healthcare and Utilities. Don’t just read “longs supported” and then enter an attractive setup on a Financials stock because if our sector read on that is correct, the sector could have a red week, and that just reduces the probabilities of success. You want to be playing where your odds of success are greater i.e. let the sector performance be a tailwind not a headwind.

If broader index participation improves from here, the market could quickly move towards Strongly Supported. There are also a few good looking themes that might need some cooling off in the immediate term… “patience Iago!”

Cheers
Musk

Disclaimer

This report has been prepared for informational and educational purposes only and does not constitute financial product advice, investment advice, a recommendation, or an offer to buy or sell any financial instrument. The information contained in this report has been compiled from sources believed to be reliable; however, no representation or warranty is made as to its accuracy, completeness or timeliness.

Any opinions, views or forecasts expressed are those of the author as at the date of publication and are subject to change without notice. Financial markets involve risk, and past performance is not indicative of future results. Readers should conduct their own research and, where appropriate, seek independent professional advice before making any investment decisions.

Unless otherwise disclosed, the author may hold positions in securities, commodities or other financial instruments discussed within this report. Any such positions do not alter the independent analysis or opinions expressed.

The Musk Report is an independent publication. The views expressed are solely those of the author and have not been commissioned, reviewed or approved by any company, organisation or issuer discussed within the report. Any company-specific commentary reflects the author's independent analysis and should not be interpreted as an endorsement by, or affiliation with, the entities mentioned.