Market Update 5/18/26

By Jerry Wagner

Market snapshot

•  Stocks: Stocks finished mixed this past week. The S&P 500 Index gained 0.1%, the NASDAQ declined 0.1%, and the Russell 2000 Index fell 2.4%. The S&P 500 and NASDAQ both hit all-time highs again this week, signaling that stocks remain in a long-term uptrend.

•  Bonds: Bonds got pummeled. The U.S. Aggregate Bond ETF (AGG) fell 1.2%, and the 20-year Treasury Bond ETF (TLT) tumbled 2.8%. 

•  Gold: Gold futures closed the week at $4,551.50, down $179.20 per ounce, or 3.79%. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week down 6.73%. The S&P/TSX Venture Index fell just 0.85%. The U.S. Trade-Weighted Dollar rose 1.43%.

•  Market indicators and outlook: Technical indicators are mostly positive for stocks, as are the strategies. The economic environment is classified as Normal, favoring gold and stocks from a return perspective. Volatility is Low and Falling, a regime historically favorable for stocks over other asset classes on a return basis, although bonds hold the top rank over stocks and gold on a risk-adjusted basis.

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Stocks

Although stock market indexes were mixed last week, the bellwether S&P 500 Index continued to rise, posting its seventh straight week of gains. The S&P 500 was the only major index to post a seventh straight weekly gain, but the other major indexes had six-week winning streaks last week. Many market pundits suggested that this could signal a blow-off market top, but market history does not support this interpretation.

Bespoke Investment Group went back to the creation of the Russell 2000 in 1979 and found only 10 times when the Russell, S&P 500, and NASDAQ had simultaneous six-week winning streaks. One week and one month later, the S&P was higher 60% of the time. Six months and one year later, the S&P had gained ground 90% of the time. The strongest gains occurred when the Index was higher after the first week following the signal—like this time.

But does the S&P 500’s current seven-week winning streak suggest a blow-off top? Again, turning to history, the answer is probably not.

According to SentimenTrader,* the S&P has had 37 seven-week winning streaks since it was created in 1928. A review of that 98-year history shows that, on average, the market was up about 1.5% one month later, rising 76% of the time. One year later, the Index was up an average of 9.7%, gaining ground in 84% of the occurrences.

Despite the ongoing conflict in the Middle East, positive earnings and economic reports have pushed stocks higher. For example, more than 70% of reported earnings and revenues this quarter have beaten analyst estimates. Retail sales, employment, and manufacturing production have shown similar strength.

Two possible flies, however, have appeared in the stock bulls’ ointment. First, reports of rising inflation due to higher oil costs have pushed interest rates higher, which is a negative for stocks. Second, while the indexes have been hitting new highs, lately those highs have not been matched by similar price action by the majority of stocks.

As the following chart shows, the April round of new highs was matched by a new high in the cumulative number of advancing over declining stocks in the Index. But last week’s new highs saw this advance-decline line fail to come anywhere close to those levels. Such a disparity has often heralded a market decline. However, a correction sparked by such a disparity can take quite a while to develop. For example, with the dot-com top in March 2000, the disparity between the two occurred two years earlier.

The bottom line: While price action, earnings, and economic reports remain positive and supportive of higher stock prices in the future, the stock market has been driving higher for quite a while and is now substantially overbought. Given the recent breakout in interest rates, a pause may be in order, especially just before or after the upcoming period of positive Memorial Day seasonality.

Bonds

As I reported in my early April Market Update, bond prices have broken out above the topping formation first established in January this year. I noted at that time, “This is a warning to stock and bond investors alike.”

I also remarked that it was unlikely that the Fed would intervene and reduce rates further. That seems even more likely now. The Middle East conflict has sent oil prices higher, and the specter of higher interest rates is weighing heavily on financial markets. The move higher in rates is clear in the previous chart, and Friday’s move higher was a dramatic breakout above previous highs.

Of course, last week’s higher-than-expected CPI report did not help matters, causing at least two members of the Federal Reserve Board of Governors to suggest that higher rates were in order. The move higher in inflation was confirmed by the PPI readings as well. It was almost the worst reading ever, second only to those recorded during the 2021–2022 period under the previous administration. Truly a bipartisan problem.

This time around, though, the cause of the increase was not legislation-induced supply-side pressure and a resulting rise in the price of goods. As suggested earlier, a reading of the report places the blame clearly on the price of oil. The former is more stubborn and did take a rise in interest rates by the Fed to try to control it. But the current oil shock is unlikely to be responsive to Federal Reserve action. It can only be reversed by an opening of the Strait of Hormuz, over which the Fed has no control. As the new Fed chair is well aware, this can happen quickly, but only by the actions of others. Stay tuned for that.

In any event, as a result of all this, interest rates have been rising, and bond prices have been falling.

Meanwhile, the high-yield bond market continues to track stocks higher. But as the following chart shows, the index of these bonds has also failed to confirm the new highs in stocks made last week.

Gold

Gold has continued to trade below its declining 50-day moving average. So far, that average has proved to be a difficult barrier to a resumption of the yellow metal’s rally, rebuffing an upside breakout three times since the decline began in January. Still, gold remains well above the lows registered in March.

Meanwhile, the U.S. dollar has been trading in a narrow range since its quick ascent at the start of the Iran conflict. The fact that it has not moved higher still is good news for gold investors, as gold normally falls in the face of a rising dollar.

FPI is the subadviser to the only U.S. gold mutual fund, the Quantified Gold Futures Tracking Fund (QGLDX), formerly The Gold Bullion Strategy Fund. Launched in 2013, the fund is designed to track the daily price changes in the precious metal in a more tax-efficient manner than its ETF counterpart, GLD.

The indicators

The short-term technical indicators of future stock market price changes that I watch are now mostly positive. Yet our QFC S&P Pattern Recognition strategy had just 20% exposure to the S&P 500 Index as of Monday’s close.

Our QFC Political Seasonality Index (PSI) strategy moved out of stocks at the close on May 8 and will return to the stock market at the close on May 22. It will remain fully invested until June 5. Thereafter, it will be defensively invested for most of June. (Our QFC Political Seasonality Index—with all of the daily signals for 2026—is available post-login in our Weekly Performance Report section under the Domestic Tactical Equity category.)

FPI’s intermediate-term tactical equity strategies remain mixed, with a defensive bias. The Volatility Adjusted NASDAQ strategy has a 20% net short exposure to the NASDAQ 100. Systematic Advantage ended the week 120% net long. Our QFC Self-Adjusting Trend Following strategy continues in its defensive mode. QFC Dynamic Trends also moved to a defensive posture in the Quantified Eckhardt Managed Futures Fund (QECTX). Investing for the longer term, Classic continues 100% long equities.

Because the QFC Dynamic Trends, Volatility Adjusted NASDAQ, Systematic Advantage, QFC Self-Adjusting Trend Following, and QFC S&P Pattern Recognition strategies can employ leverage, the investment positions may exceed 100%.

FPI’s Growth and Inflation measure, one of our Market Regime Indicators, shows that markets are in a Normal economic environment stage (inflation and GDP are growing). Historically, a Normal environment has occurred 75% of the time since 2003 and has been a positive regime state for stocks, bonds, and gold. Stocks have the highest rate of return in Normal periods. Gold has the second-highest return but has also experienced high drawdown in these environments.

Our S&P volatility regime is registering a Low and Falling reading. Since 2003, this environment favors stocks over gold and then bonds from an annualized return standpoint. Gold has the highest drawdown risk among the three asset classes. Bonds have the lowest return, risk, and drawdown. The Low and Falling combination has occurred 32% of the time since 2003.

*Sundial Capital Research (SentimenTrader.com) is an independent market research and analysis provider. SentimenTrader’s research and views are not investment/trading advice and do not endorse or promote any external investment strategies. All opinions and analyses are based on publicly available data. Past performance is not indicative of future results.