Broader market breakdown is increasingly worrisome, specifically the absolute trend damage in Technology. However, both QQQ and SPX are right at October lows, and technically should attempt to make a stand and bounce starting early next week. Both US Dollar along with Treasury yields have wobbled near recent highs, and further gains should prove minimal and short-lived. A sharp, high breadth rally is needed nearly right away to prevent selling pressure into late October.
No meaningful change in technical thinking given Friday’s decline and both QQQ and SPY are now within striking distance of October lows, which remain the most important area to concentrate on heading into next week.
The bearish news seems overwhelming, whether it be concerning geopolitical risk growing, or interest rates ratcheting up sharply this past week, hiking mortgage costs to over 8%.
Unfortunately, despite some sentiment polls reflecting bearishness, many others are more neutral, not bearish. AAII data released Thursday proved largely neutral with Bearish and Bullish investors both at 34%. Additionally, the latest NAAIM readings from 10/18 showed a rally up to 66% from under 40% last month. Moreover, both Societe Generale’s sentiment indicator along with VanEck’s Social sentiment ETF are both higher than they were back in early October. No evidence of volume dispersion has yet been seen to indicate capitulation, per high TRIN readings, nor severe VIX backwardation. Thus, making the case that markets should bottom based on “severe bearishness” is not entirely accurate from the polls I’ve seen this week. (Whether this truly needs to happen at a market low is dubious. However, truly fearful readings do help to add confidence to a more long-lasting low.)
Overall, some continued deterioration happened this week to a number of SPX sectors, with Materials, Consumer Discretionary, REITS and Technology making meaningful breakdowns. Furthermore, the prior lift we saw in Transportation stocks as well as the Small-cap sector proved short-lived indeed. Technology’s breakdown on an absolute basis is certainly one of the more important developments for this week. (However, this was purely on an absolute and not relative to S&P 500 basis.) Overall, I am growing increasingly more concerned about the degree of weakness in many sectors, and to have faith of a robust 4Q rally getting underway, this weakness needs to be reversed right away.
My near-term thoughts, however, are unchanged, and I am expecting SPY and QQQ to hold October lows into next week given some of the reasons I discussed yesterday. For those that might have missed Thursday’s comments, these are as follows:
- Sentiment has turned more skittish given the Israel/Hamas war, and seasonality typically provides buying opportunities for falling Equity markets into October during times of negativity.
- Technology has remained a very strong part of the market and has outperformed most other sectors over the last 1 and 3-month periods. Financials looks to be joining suit, and Industrials remain a very strong sector which should be overweighted and have not broken down sufficiently to avoid.
- Seasonality studies for Pre-election years typically show a much better October following a sub-par August and September.
- TLT is showing positive momentum divergence on the break under $83 and could be within 2 days of registering both TD Combo and TD Sequential 13 exhaustion signals.
- Elliott-wave structure still seems corrective from mid-October
As seen above, SPX officially broke its 200-day moving average on Friday. However, this is largely meaningless, in my view, given that price/time relationships seem to concentrate on early next week, not Friday for a reversal. For those who have backtested the 200-day as a support target, it’s hardly the kind of reliable gauge that “most Technicians” look at for support guidance.
Overall, there are meaningful reasons besides the 200-day moving average that suggest 4200 area has importance, and this has not been broken. I suspect that prices can hold 4200 and turn higher early next week. However, it’s vital that some upward thrust in breadth and momentum happen sooner than later to help confirm that any bounce can last and not prove short-lived before November weakness. Increasingly I am putting more and more faith into the cycle composite that shows a late November low for SPX, and expect that December can finally result in the kind of seasonal rebound that investors can trust a bit more than the bounce we saw from early October.
SPY showing possible exhaustion counts within 2-3 trading hours, which signals possible Monday stabilization at October lows
Hourly DeMark exhaustion signals correctly signaled the peaks on 10/12 and also 10/17 and are also thought to likely be important for Monday, but at marginally lower levels. Hourly charts shown below could produce counter-trend exhaustion right near the key 420 level in SPY during the first few hours of trading on Monday. Intra-day lows on 10/3/23 were 420.18.
Overall, this selling looks to be near exhaustion in the short run, and stabilization is expected into Monday’s trading 10/23/23. SPY is growing very close to being an attractive short-term risk/reward.
Importantly, any rally will need to be accompanied by strong breadth and upside volume to have credibility as a meaningful low. Any inability to climb back up above SPY-438.14, the intra-day peaks from 10/17/23 would be a negative heading into end of month.
Technology has followed through on September weakness
Unfortunately for Technology investors, Equal-weighted Technology ETF RYT has just broken down to the lowest levels since this Spring. This is a negative short-term development for Technology (Tech), and by extension, QQQ 1.40% which likely could reach $351-352 into Monday, a level of strong support.
However, this weakness is purely on an absolute basis, not relative to the S&P 500 which I feel is much more important. Trends of Tech to SPX remain trending higher and are intact.
Near-term, Tech is under pressure and should underperform on Monday/Tuesday ahead of likely stabilization, and a bounce next week, in my view.
Relative charts of QQQ to SPY also show a near-term breakdown, but are trending up from the last few months, and this ratio is nearing key trendline support and might find support also early next week (Not shown)
Bottom line, a breakdown in Technology is discouraging, as Tech remains the most important sector in the SPX by capitalization. Until/unless QQQ breaks to monthly lows, along with QQQ violating its uptrend to SPY or Tech vs. S&P in equal-weighted terms also breaks its uptrend, I feel like this near-term weakness should find support and stabilize next week. However, it will be important for Tech to rebound sharply and that might depend on Treasury yields turning lower. The lack of a strong bounce into early November would likely result in US Equity markets weakening further into mid-to-late November.
SXXP has broken to multi-month lows and still favored to underperform S&P 500
Europe’s STOXX 600 broke down to multi-month lows today, and far weaker than SPX.
While SPX has begun to show some near-term weakness, it’s unlikely in my view that October lows are broken right away. STOXX 600 closed near lows of the session in Europe at 433.73 and sets up for a test of the 50% retracement area at 426 which lies right near March lows at 427.77, a level which I feel should be challenged early next week.
Finding support next week near 426 could provide some support to European equities, via STOXX 600. Bottom line, US Equities are still favored over Europe, and SPY is a more appealing technical choice than VGK, the STOXX 600 ETF
