What’s needed to think a Market Low could be imminent, or is in place

Breakdown in SPX and QQQ have postponed an immediate Tech-led rebound, but even after Wednesday’s weakness the near-term selloff likely does not have more than 2-3 days before finding an actionable low which can produce a large rebound.   However, given the degree of widespread technical damage in many sectors it’s going to be important to see more evidence of a rolling over in both US Dollar and Treasury yields. 

Bottom line, the breakdown in GOOGL 0.48% , AMZN, not to mention ADP, and AMD helped to strip the Band-Aid off the diversion which was formerly “Large-Cap Technology” in camouflaging SPX and QQQ to the weakness that’s been occurring in the broader market for the last couple months. 

Specifically, half of the major 11 S&P Sectors had fallen to at least nine-month lows ahead of Wednesday’s breakdown.  Only four sectors, namely, Technology, Comm. Svcs, Industrials, and Financials, had fallen to four-month lows, while Energy had held up best of all and has sold off “merely” to mid-October lows.

This illustrates an important point.  Wednesday’s 10/25/23 decline was not the start of a big breakdown in stocks, in my view.  This has been going on since August and has gotten increasingly worse.  Only 17% of SPX stocks are above their respective 50-day moving averages (m.a.) while less than 1/3 are below their 200-day m.a.’s.

Overall, I feel that a trading low is close.   This doesn’t mean I’m wildly bullish here, nor that I’m wildly bearish here.  An immense amount of damage has occurred, and I generally am always of the opinion that it’s unwise to try to pick lows after markets have plummeted to multi-month lows.

Trends, and momentum have been clearly bearish for weeks.   Equal-weighted SPX along with Value Line broke down to the lowest levels since last Fall, which I discussed in notes earlier this week.  Thus, trends have been bearish for some time.  However, there were reasons to hope that if QQQ could hold former lows that Technology earnings might be able to cause a rebound.  This failed to materialize after Wednesday’s trading, but does not change the broder picture dramatically.

Unfortunately, Wednesday’s selloff lacked a huge volume dispersion to the downside which might have warned of signs of fear.  As I’ve discussed in recent notes and last week, most of the sentiment gauges I look at were largely more neutral ahead of Wednesday, not bearish.

While I was certainly hopeful that QQQ and SPX would hold October lows and Tech earnings could lift markets this week, this doesn’t seem to have been the case based on Wednesday’s result.  I’ll discuss some things that need to happen below before having a huge amount of confidence that it’s right to buy into this market. QQQ targets might materialize near 345.

What needs to happen to think Lows are near or could be imminent:

1. Trin readings (ARMS index) > 2.  This involves a much heavier reading in volume into Declining vs. Advancing stocks vs the actual A/D reading itself.
2. DeMark related “13 Exhaustion Countdown” readings which are then confirmed, not just with SPX, but also QQQ which could be more important given Technology’s influence.  This would take on even more importance if daily TNX and/or DXY charts also showed similar upside exhaustion, warning of a potential rollover.
3. Divergences in momentum, and breadth.  Note, these have started on a short-term basis, but are not yet in place across multiple timeframes and I do not suspect this will happen.
4. Sentiment readings via Daily Sentiment Index, AAII, Fear and Greed Index, Societe Generale Sentiment index, VanEck Social Sentiment ETF reaching bearish levels, along with VIX backwardation, and 5 day averages of Equity Put/call ratio reaching levels seen in early October.
5. Evidence of heavy SPX constituent sectors like Healthcare and Financials reaching former lows and showing evidence of stabilization.  Note, Healthcare has been abysmal of late, while Financials strength has not been present in the Regional Banks or Money Center banks like BAC 0.73%  nor C 0.30% .
6. Signs of Small-caps and Mid-Caps trying to bottom out, along with leading sectors like Transportation stocks.  Note, these had attempted to carve out short-term lows, but this proved quite short-lived and along with KRE 1.15% ’s failure, turned back lower over the past two weeks, which was important and negative for broader indices
7. Strong evidence of gains coinciding with short-term cycles in turning higher.  Note, this generally has failed over the last two weeks and the next key area of focus is late November into early December for a more serious Low.   This does not mean that markets have to decline straight down into this period.  In fact it’s highly likely that at least a minor low could materialize within 3-5 trading days as fear elevates on the following:
   • A) Failure of 200-day m.a. to have held in SPX
   • B) Failure of a new House Speaker in D.C to have coincided with a rally;
   • C) Failure of a market rally on Bloomberg news that Israel might postpone a ground war in Gaza
   • Overall, none of these reasons are all that important as to why markets could truly bottom, but they matter in the eyes of market participants, and the lack of them working often can serve to shift sentiment to more negative.
8. Evidence of US Dollar index or Treasury yields in showing meaningful weakness that breaks uptrends of the past few weeks or months.

Overall, I suspect that at least some of the reasons above should be in place as October comes to a close.  However, given the extent of the broader market damage, the burden of proof is truly “On the Bulls”  It’s difficult to try to time the lows given lack of price confirmation thus far. 

Bottom line, actual price reversals which occur on heavy volume or breadth expansion that recoup former areas of support which have been broken mean more than any of the above in suggesting that lows are at hand.  My QQQ target is at 345, and SPX can weaken to 4150-65 in all likelihood into Friday and/or Monday of next week.

Breadth has reached levels coinciding with prior lows

The chart below highlights the SPX along with the percentage of members above their 200-day moving average (m.a.) in Blue along with the Percentage of SPX members above their 50-day m.a. in Yellow.

As seen below, the percentage of stocks > 50-day m.a. has reached levels coinciding with prior lows.  However, the Percentage of stocks > 200-day m.a. is not yet at levels seen at last year’s October lows, nor June 2022 lows. 

Overall, I don’t think this has to happen.

However, also interesting to see that prices in SPX have held up much better than on previous occasions when breadth reached such contracted levels.  This owes largely to Large-cap Technology. 

As mentioned in recent days, despite the absolute weakness in Technology, this sector remains trending up vs. SPX in relative terms.

Healthcare has proven quite disappointing

The breakdown of the horizontal support trendline for Equal-weighted Healthcare was bearish last year and shows why this sector has had a difficult time in helping SPX to stabilize given its descent.

Given that Healthcare is 12.5% of the SPX, this breakdown is important and makes further absolute declines in Healthcare likely.

Given that last October’s lows lie just fractionally below current levels, I feel that a test of 2022 lows is likely for Healthcare on an Equal-weighted basis (Invesco’s RSPH 0.82% ) before this can likely bottom out.

Healthcare’s appeal has deteriorated also relatively vs. SPX and I do not suspect Healthcare outperforms in 4Q given this recent weakness.  Overall, my sector view on Healthcare is a Neutral, not Bullish and I do not expect that this group outperforms in the final two months of the year.

Financials also have pulled back to multi-month lows which has prohibited SPX from stabilizing

This chart of Invesco’s Equal-weighted Financials ETF (RSPF 0.62% ) also has weakened down to multi-month lows, given some of the weakness seen in recent weeks in Regional Banks and also Money Center Banks.

While I have a technical Underweight on Financials for 2023, I suspected that some relative strength could happen in 4Q for this sector.

Note, this has largely occurred in Insurance stocks and Exchange stocks along with the Credit card companies, but Banks remain quite weak technically speaking.

Until Financials reach former lows, which are at $47.29-$48 as a zone of support, vs. Wednesday’s (10/25/23) close of $48.75, it’s unlikely that markets can make a serious low.  However, I expect that these levels will likely be reached into the end of October and can serve as serious support and allow for the much needed stabilization and subsequent market rally into mid-November.