Key Takeaways

  • Tuesday reversed lower after SPX was unable to recapture 4000
  • QQQ might bottom out in early June vs SPY which would be bullish for Growth
  • Energy looks to be 2-3 weeks from peaking out vs. Technology
  • Credit spreads have widened a bit, yet LQD remains in larger downtrends vs JNK
QQQ might bottom out vs SPY in early June
QQQ might bottom out vs SPY in early June

Still no meaningful change in trend.   SPX failed to climb above 4000 and despite a sharp two-day rally from last Friday’s lows, there hasn’t been any progress in breaking the ongoing downtrend.  Thus, while 1-2 day trends had turned more positive, the larger trend from late March remains bearish, with little evidence of meaningful oversold conditions, nor capitulation.  Movement up above 4000 is an initial requirement before weighing in on a rally extending at this point.  As we’ve discussed on these pages numerous times, more is needed than a single DeMark daily exhaustion signal to trigger a larger rally after a 20% decline in SPX (in my personal view).   Weekly counts remain premature.  However, two interesting points to note: First, there has been a bit more stabilization in trends over the last couple weeks, and prices closed over 5/12’s close.  Second, four sectors were higher in Tuesday’s trading, but the damage in Technology and Consumer Discretionary made Tuesday feel a lot more negative.  Momentum has begun to show readings that are not as negative as two weeks ago.  

QQQ might bottom out vs SPY in early June
Source: Trading View

Unfortunately, until 4000 is recouped, the odds are high that SPX moves down to test and briefly undercut 3810.  Finally, next week post Memorial Day holiday presents the next opportunity for at least minor stabilization in trends which has more significance, time-wise.

What my interpretation of DeMark’s indicators suggests  

Below are some conclusions of my own interpretation of DeMark’s indicators for Equity indices and some sector thoughts. 

Overall, daily charts of QQQ, SPY do look to be close to levels that might offer some support to this pullback and allow a bounce to unfold.  This relies upon QQQ finishing its 9-13-9 count which could take another 2-3 trading days.   While QQQ and SPX have both signaled daily “13 Countdown” exhaustion readings, these are insufficient (using my own methods/interpretation) to drive major lows in indices following a ~20% drawdown.

Weekly TD signals using Combo and/or Sequential look to be 5-6 weeks away potentially.  This would line up with my larger cyclical thoughts about the potential for a market low into late June/early July which aligns with two different cycle composites I employ.

Weekly IVW/IVE (Growth vs. Value) also looks to need to move lower on a 1-2 week basis before triggering any kind of exhaustion

Weekly ratio charts of QQQ/SPY suggest QQQ could be within 1-2 weeks of a near-term bottom and might materialize on a decline to new weekly lows into next week.  This weekly chart is shown below.  Overall, my own use of these indictors leads me to suggest that confirmation of a signal is imperative before making too much of any given signal.  The preponderance of evidence to me suggests that many signals are possible in June.

QQQ might bottom out vs SPY in early June
Source:  Symbolik

(As noted, these are not DeMark’s thoughts, but mine, and my own interpretation of how I utilize these indicators) One should consider seeking out Tom DeMark’s books, and/or those written by Jason Perl on the subject for more information and education for those who wish to learn more.

Energy looks to be possibly within 2-3 weeks of peaking out vs. Technology

Based on the same counter-trend tools used to play a part in the analysis of indices above, relative sector charts of RYE vs RYT show Energy to be in the final wave of this bounce vs Technology, possibly within three weeks’ time.  This would allow for Energy to start to peak out relatively vs. Technology in June, directly lining up with Growth bottoming.  At present, this is also early, yet close based on DeMark’s indicators, but is a unique way of utilizing these tools on a relative basis, which I find useful.  Until a reversal signal is confirmed, and there is meaningful evidence of Energy charts starting to show more weakness, Energy remains trending up vs. Technology, but might reverse course in June.

QQQ might bottom out vs SPY in early June
Source:  Symbolik

High Yield has finally begun to widen out vs Investment grade Corporates in May

At a time when Treasuries have begun to rally in the last couple of weeks, we’ve seen some notable widening out in Junk bonds vs Investment grade Corporates along with some rally in the High Yield Option Adjusted Spread (OAS).  

The chart below highlights the ratio of  LQD -0.09%  (Ishares IBOXX Investment Grade Corporate Bond ETF) in ratio form vs  JNK -0.16%  (Ishares IBOXX High Yield Corporate Bond ETF).

The breakout of this four-month downtrend from December indicates that high yield is finally beginning to experience some meaningful lagging vs. Investment grade which had largely been non-existent during the initial part of this Stock market decline since January (though largely at a time when rates had been rising; Stocks and Bonds were declining in unison).

Now we’ve seen a bit of a break in this correlation as Treasuries are rallying while Equities have sold off in recent weeks. As many know, studying JNK, or HYG on its own is largely ineffective, as this is priced in Dollars and can move simply as interest rates show volatility.   However, the ratio of this relationship can be more helpful towards understanding what’s possibly happening with Credit (which remains overall very difficult to analyze technically speaking).

Two important key takeaways in my view.  First, high yield spreads have been widening out, as LQD has advanced quicker relatively to JNK (in other words, some meaningful lagging in JNK).  Second, this larger downtrend from March 2020 remains very much intact, which is a comfort, indicating that despite this rise, it’s not really affecting markets too meaningfully just yet.  My own view is that this might involve Energy and WTI Crude oil having traded relatively much better in recent weeks, months than in early 2020, when WTI briefly went negative.

Overall, despite this lift in recent weeks, this doesn’t seem to be a concern just yet for risk assets and High yield credit remains in relatively good shape

QQQ might bottom out vs SPY in early June
Source: Optuma
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