The stabilization attempts in US stocks have largely proven to be a failure in recent weeks, and the ongoing downtrend for SPX from January peaks remains intact with no ability to bounce into the FOMC meeting this week (which was thought likely). While Treasury yields have spiked back to monthly highs in recent days, equities remain under pressure. Overall, undercutting 4157.87, last week’s lows, will be problematic for the near-term bullish case. This would allow for a move down to 3950, or below to near 3815, which lines up with my 2022 Technical Outlook downside target for the Base Case scenario, discussed two months ago. It’s important that prices stabilize sooner rather than later, as this consolidation triangle looks to be attempting a downside breakdown. Any violation of February lows would result in acceleration that likely should extend to create wave equality before any meaningful low is in place. 4300 is the first upside area of importance, and above leads to 4365, but it is thought to need to happen quickly.
Death Crosses really aren’t so bad after all
While the near-term trend for US equities from January highs remains bearish, SPX has just produced the so-called “Death Cross” which typically garners plenty of media chatter. This is a condition where the 50-day moving average (m.a.) crosses below the 200-day m.a. and is often thought to be negative for US Stocks. (This happened in SPX on 3/14 with the 50-day m.a. having crossed back under the 200-day m.a.).
However, after 48 occurrences since 1929, the average return on a three, six and 12-month timeframe were all positive for SPX with an average three-month return of 2.1%. While these returns certainly lagged the performance of the reciprocal signal (the Golden Cross- i.e. 50-day crossing above the 200-day m.a.) it was surprising to see average turns over the last 90 years which proved to be positive. Much of the reason of why it’s important to discuss Death Crosses has more to do with the condition of the market having weakened enough where the moving averages have begun turn from upward sloping to downward sloping. It can be insightful to understand the broader strength of a market or weakness at any point in time. However, trying to utilize these for trading purposes is tricky at best, and looks largely ineffective.
Ironically the last four of six occasions, the Death cross has ended up giving a signal that turned out to be closer to a market low, than a high. The results of this study are shown below.
2’s-10’s curve is now within striking distance of being inverted. When eyeing the yield curve, as shown by 10-year yields minus 2-year yields below, this has nearly reached inverted levels for the first time since Spring 2020. At that time, this proved to be short-lived before turning higher, but did usher in a brief recession. As shown below in “Red” these are the prior times of the yield curve inverting. The subsequent grey bar highlights the time of recession for US which followed this inversion. On average these lagged the inversion by 12-18 months. However, given that yield curves have flattened out to near inversion territory, giving this a close look should be important if this were to happen in the weeks/months to come.
Energy pullback will offer Bulls a chance to buy dips later this week
WTI Crude’s stalling out and minor consolidation has resulted in minor pullbacks for the major US Energy ETF’s, XLE, OIH and XOP. The near-term technical picture has not changed materially for Energy, and this pullback should create buying opportunities into/after FOMC for Energy. Overall, despite volatility returning to the Energy market with a vengeance, one cannot view the setback in recent days as being all that bearish.
As seen in daily charts of OIH, it’s uptrend remains very much intact, and any short-term decline in WTI Crude to the mid-90’s sets up for an appealing buying opportunity from a risk/reward basis in OIH near 255-265 in the days ahead. Thus, for those that missed this Energy rally following the initial Russian invasion, or were adept at selling recent highs, using this pullback to buy dips makes sense, technically speaking. Energy remains the best area in the market near-term and should be overweighted for 2022, using dips to buy when given the chance.
