Fri, October 1, 2021 | 6:33PM ET

Minor bounce to kick off October, but the Damage has been done

Name: FS Insight
Price range: $$$

FS Insight Team

Key Takeaways

Minor bounce looks to be underway to kick off October after several failed pullbacks in the last 24 hours. Given ongoing negative trends/momentum from early September, this is thought to prove short-lived and not eclipse SPX 4400 before additional weakness
Market breadth remains abysmal with Percentage of stocks above their 50- and 200-day moving averages having reached new lows for the year while momentum not oversold
No evidence of capitulation to think this short-term decline has run its course. While risk/reward of buying dips is improving, the next 2-3 weeks could prove challenging

Breakdown in QQQ under a two-month Head and Shoulders reversal pattern makes it early to expect bounces have any longevity. Downside targets lie at 350-2 then 346. Movement above 374 needed to think this decline is temporarily over.

Minor bounce to kick off October, but the Damage has been done — Source: Optuma

New Technical Developments

S&P closed out the month of September with the worst one-month return since last September 2020, and investors have been rudely awakened by a new era of volatility, not only in Equities, but also Treasuries, and FX.
S&P, NASDAQ and DJIA all broke uptrend lines going back since Spring 2021 which has caused daily and weekly momentum gauges to turn negative. While hourly momentum has become oversold which could lead to a bounce, daily RSI is nowhere near oversold and structure remains bearish in the short run.
Junk bond spreads have largely ignored the Equity decline in September and Investment grade corporate spreads tightened 6 bps in the month of September
NYSE Advance/Decline remains below its 2021 peak from June and percentage of stocks above their 50, and 200-day moving averages (m.a.) have reached new lows for the year

As seen below, the percentage of SPX stocks above their 50-day moving average has dropped below 25%, a very weak situation, while the percentage of stocks above their 200-day m.a. has now reached 60%, also new lows for 2021. Meanwhile, traditional momentum gauges like RSI are not oversold on daily charts.

Trying to buy 5% + pullbacks without capitulation can sometimes prove tricky

No evidence yet of a high TRIN (Arms index) reading above 2 that typically can coincide with equity index lows. More downside volume as a percentage of total A/D is required
No VIX Backwardation and Spot VIX remains compressed below near-term Futures contracts
Equity Put/call ratio has been on the rise, but has not yet reached 1.00

While fear gauges seem to be on the rise and disgruntlement widespread given concerns about FOMC tapering timelines and Peak growth, Put/call data hasn’t yet reached extremes and still below levels seen back in July

Bottom line, while near-term strength might last into early next week, trends and momentum are bearish and breadth has been falling sharply following the structural weakness. While October typically is a “bear-killer” and often the turning point for sharp Equity declines, more evidence of capitulation is thought to be necessary in this highly uncertain environment rife with economic and policy risk

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