Friday’s decline likely postpones an immediate Equity bounce until mid-next week, but Equities along with US Dollar and Treasury yields all seem to be nearing critical areas of support which might allow for a reversal of trend back higher ahead of the FOMC meeting. Momentum is short-term bearish, but not oversold. However, the act of closing near the lows of the session on an above-average high-to-low range on Friday likely means the Equity market needs a few days before it can properly stabilize. Most of the weakness continues to be seen in Technology and has not adversely affected many of the sectors which just rose to new all-time highs last week. Cross-asset volatility is certainly present now in September, and I still feel that US Dollar and Yields have shown far more volatility than the equity market thus far. Overall, I still view the recent weakness as being a minor pullback in many sectors including Technology, and not the start of a larger selloff. However, it’s fair to say that the market was caught a bit offside on this week’s economic data, and the upcoming rate cuts can’t come soon enough.
It seems that Equities are finally paying attention to recent economic weakness which historically has just affected bond yields and FX. Despite the severe weakness in Semiconductor issues though, it’s still difficult to say with certainty that the Equal-weighted SPX has made a peak of any magnitude. Keep in mind that all-time highs for Equal-weighted SPX just happened last Friday.
The fact that fear has been slowly but surely escalating this week is seen as a promising sign for risk assets for a bounce. However, I don’t have confidence of an immediate rally just yet given the magnitude of Friday’s decline. I’m also skeptical that August lows are broken right away and the next few trading days should allow for some stabilization ahead of a rally.
SPX daily charts show prices having broken 5463, which was the area near the open gap, along with having violated the 38.2% Fibonacci retracement area of the prior rally from early August. This was an area of support I was watching, and it was violated on Friday.
At present, prices are now hovering directly above the 50% retracement area near 5383 which should come into play on Monday of next week. As I wrote yesterday, only if 5383 is broken would I begin to harbor worries about a larger correction.
One thing to note is that the extent of this week’s selloff has caused this decline to resemble a five-wave pattern from the recent peaks. Thus, if this is correct, then it’s tough to say with certainty that a move back to new highs will come about right away. One possible scenario is that a bounce starts either mid-next week, or following the FOMC meeting, which fails to get back to highs and then allows for a subsequent decline in October which should be buyable into the Election.
Momentum will slowly but surely begin to turn lower on many timeframes, in my view, if this pullback does not stabilize in short order and begins to rally back sharply. Furthermore, a deeper retracement than 61.8% of the rally from early August would also raise the odds that any bounce would bring about further selling in October.
S&P 500 Index
USD/JPY looks to be nearing support
One encouraging development concerns the US Dollar having begun to stabilize near December 2023 lows while Yen has rallied back to retest the peaks from early August vs. the US Dollar (shown below as US Dollar vs. Yen).
Given that the spike in the Yen following the carry-trade Unwind directly coincided with the Technology selloff, it looks encouraging if Dollar/Yen can find support near a prominent former low and begin to bounce.
USD vs JPY
TLT also looks to be nearing resistance
Another interesting development concerns the Ishares 20+Year Treasury Bond ETF (TLT -0.72% ) which has just broken out of a triangle pattern and now nearing resistance.
The fact that markets seem to be no longer rewarding bad economic news with market rallies can help to shed some light as to why TLT getting close to resistance might have importance.
Given that weak economic data on Friday resulted in yields plummeting as well as the stock market, it stands to reason that signs of TLT approaching a temporary peak might result in upcoming economic strength (potentially at next week’s CPI report) which might cause bond yields to reverse.
Thus, if bond yields begin to backtrack on economic strength, this might also be important for US Equities as a tailwind, temporarily speaking.
Bottom line, I expect TLT to rally to 101-102 but then likely stall and consolidate in October. Given that stocks sold off sharply as bond yields and the US Dollar fell, it might be important if this recent cross-asset volatility started to wane a bit.
For now, I view this breakout in TLT as still bullish for Treasuries, meaning that bond yields on the long end likely retreat a bit more next week ahead of a stalling out.
TLT
Equity Put/call ratio now at levels from April and August
The rapid rise in the Put/call ratio for Equities signals that markets were certainly caught off guard by this week’s selloff.
On a weekly close, Equity put/call ratio closed at the highest levels of the year. As can be seen on this daily chart below, this ratio has now tested levels from April and August which both coincided with lows in the Equity market.
While sentiment had gotten more optimistic most of August during the bounce, the last couple of weeks of Technology selling has certainly had a dampening effect on sentiment.
In summary, while one can’t say uniformly that sentiment is back to bearish levels when taking multiple sentiment polls into account, in the very near-term, seeing Equity put/call ratio back at 1 is certainly a sign of short-term fear.
Moreover, it’s thought that the next week should bring about a low in the Equity market given this rapid rise.
Put/Call Ratio
