Lows are growing near; Yet a lot of damage has been done

It’s important to take stock of the damage after the Banks crisis led many other sectors down sharply and has caused some greater technical damage than what was seen a month ago.

Deterioration in Industrials, Discretionary, Materials, Healthcare and more recently in Energy and Financials has resulted in intermediate-term trends giving way and weekly momentum (per MACD) rolling back over to negative. 

Technology, to its credit, has enjoyed a very sharp period of outperformance, and the relative strength in Tech is one of the few reasons why broader market averages have held up a bit better than what otherwise might have occurred.  QQQ0.82%  and SPX haven’t shown nearly the extent of the damage this week than what’s been seen in sectors like Financials and Energy.

Does this mean the market is doomed this year and the economy goes into an imminent recession?  Hardly.  Yet, in the short run, it continues to be difficult to think stock indices have officially bottomed without proof.  QQQ requires a close over 300 and SPX a close above 3928.

My cycle composite calls for lows this week.  However, DeMark indicators on Energy and Financials seem to suggest Friday and/or next Monday might be more important than today (3/15).  That would also line up with a very strong seasonal time at the Spring Equinox, which according to legends like W.D. Gann, are some of the most important turning points of the year.

Wave structure of this current decline from 3/6 in the short run shows the potential of a test/brief undercut of 3800 now given the damage from the last few days.  This isn’t a strong conviction technical call.  However, it cannot be ruled out heading into the end of week.

As the hourly chart shows below, the bounce from last Friday proved to be just a three-wave move before prices turned down sharply yesterday into today (Wednesday)  However, this should represent the final pullback from 3/6, and on severe weakness, this would bring about lows on Friday/Monday at 3760-80. 

It goes without saying that any European emergency measures taken in the short run to help Credit Suisse (CS) that cause a rally which lifts SPX back over 3928 would be an indication that the bounce has begun.

QQQ, to its credit, is trading near the same levels of last week, having shown little to no real weakness this week, largely due to Technology outperformance.  QQQ0.82%  has actually risen for the last three trading days. 

Bottom line, markets are growing closer to lows; Yet it’s still tough to say we’re there without proof of real strength.   For SPX this depends on regaining the area of its breakdown.  For QQQ, prices will need to eclipse 300, which would allow for an upward acceleration that could allow recent DeMark signals to recycle.

SPY has broken down vs Treasuries

Given the extraordinary near-term volatility in the bond market globally, it might not be surprising to see that SPY has cracked a six-month uptrend vs TLT the Ishares 20+ Year Treasury Bond ETF.

The former positive correlation between Treasuries and Equities following the worst year for a 60/40 Stock/Bond portfolio mix ever looks to have gotten completely unwound in recent weeks.  The huge rally in Treasuries has coincided with a rapid dropoff in Equities, not a rally.

Now Treasuries are rallying sharply across the curve and Equities are selling off sharply, ignoring the correlation which has been going for more than a year.

On a short-term basis, this decline looks to likely test last Fall’s lows in relative terms.  This equates to either Equities weakening vs. Treasuries, or something to make yields accelerate at a faster pace than Equities.

To have faith of Equities outperforming bonds, this ratio chart needs to regain the area of this week’s breakdown.  Over the next week, bonds look likely to outperform as yields weaken further.

Small-caps have moved rapidly out of favor, but should near support vs. Large-caps at former lows

As might be expected, the composition of Regional banks within the Russell 2k has caused severe underperformance in Small-caps

This ratio of Russell 2k to S&P 500 which was on the verge of breaking out, took a violent turn lower following the Regional bank selling this week.

This ratio has broken the uptrend that had been slowly helping Small-caps to make progress since last May over 10 months ago.

The quickness of this decline has now taken the ratio to within striking distance of former lows.  Given that Banks are rapidly growing more and more oversold, I expect that Small-caps likely will begin to stabilize towards end of week and begin a bounce.

IWM-0.85% , the Russell 2000 Ishares ETF, has strong support down at $162, but will be attractive on any decline in the next couple days under $170.  This would represent the first opportunity to expect support on this decline. 

OIH looks to have strong support at $250-$255 into Friday 3/17 into Monday 3/20

It’s important to take a closer look at Vaneck Oil Services ETF (OIH0.33% ) given the sharp breakdown in WTI Crude in recent days.  As of two weeks ago, there was speculation that Oil could bottom and Oil stocks could turn higher.

That clearly has been put on the back burner now with Crude having engineered a false breakout and violated support, and Energy has been accelerating lower.

Importantly, this oil decline does not diminish the prospects for Crude and Energy as a sector to outperform for 2023.  However, in the near-term, it’s difficult to expect stabilization just yet, and XLE0.48% , OIH0.33%  and XOP all look to move lower into end of week.

Given such a sharp decline in many names (HAL-0.21% , MRO0.76% , DVN0.90% , SLB0.67% , APA0.97% , FANG0.37% , EOG-0.18%  all fell more than 7% on Wednesday alone) there will be opportunity in Energy from a deeply oversold state as early as Monday 3/20. 

Oversold momentum is hardly a sufficient reason to call for a bottom.   However, DeMark TD Buy Setups look possible to materialize for XLE0.48% , OIH0.33%  and XOP by end of week which should happen at a level above TDST support.

Additionally, this area equates to a 61.8% Fibonacci retracement zone of the prior advance.  Overall, I’m not normally a fan of buying into extreme weakness.  Yet Energy is likely to provide some tactical trading opportunities for those who like buying dips, and this likely materializes in the next week.