The post-holiday selling in US Equities during this shortened week seems to be shaking the confidence of many investors despite the lack of any material decline for the stock market. VIX and Japanese yen did continue to trade higher on Wednesday, while yields have made a vicious two-day decline that has been much greater than what’s happened in recent weeks. As discussed last week, five sectors rose to make new all-time high monthly closes, and despite Technology waning a bit, there hasn’t been any material breakdown. Given that market breadth remains in good shape and Equal-weighted SPX has recently pushed back to new all-time high territory, I’m still inclined to expect a possible SPX rally back to new highs and don’t feel that this week’s slump represents any major selloff. If/when bullish price action happens into mid-month, there might be a technical case for weakening into October. However, I’m skeptical at this time that this early weak consolidation leads to any real broad-based market weakness.
Despite some signs of risk-off type behavior in other asset classes outside of Equities that have exhibited some above-average volatility of late, the actual Equity selling pressure proved far more muted on Wednesday than what was seen on Tuesday. Trends and momentum from early August lows remain in “pretty good” shape with not much deterioration.
While this early week decline has been a bit unsettling for market bulls and has been cited by the bears as the “start” of some larger volatility for Equities, I just don’t see that yet from my work. As I discussed in Flash Insights this afternoon (kindly review if you missed this) a few option-related trades very well could have helped to exacerbate Tuesday’s decline, as opposed to this representing any meaningful fundamental shift for US risk assets.
Overall, I felt it might be necessary to showcase some of the warning signs I typically look for and what might materialize before any larger selloff gets underway. A list of these is below. However, initially it’s important to review the SPX chart, which attempted to stabilize Wednesday near its 50-day moving average, which some find important as support.
I tend to find moving averages inconsistent at best and never put much trust in most moving averages as signifying support or resistance, simply because price and time are rarely aligned most times to create meaningful turns.
Without going into detail this evening, I’ll simply say that the area from 5442-5463 support up to 5503 still looks important as two key areas of support which could help mark a low to this recent pullback. Only if 5383 is broken would I begin to harbor worries about a larger correction.
For now, prices likely should stabilize over the last two trading days of this week and turn higher into mid-month back to new all-time highs. Such a development would mirror the cycle composite which calls for higher prices into 9/17.
S&P 500 Index
Warning signs which likely would coincide with our seasonal Fall correction
Many of the warning signs on this list below have not occurred yet, and as such, I don’t believe that stock indices are all that vulnerable despite being in the bearish month of September.
If/when these start to resurface into mid-to-late September, then I’ll certainly pay attention.
- SPX, QQQ, DJIA and IWM all turn down to break August lows. At present, markets remain churning in consolidation within 1% of all-time highs (^SPX 2.07% ) even after the minor hiccup in Technology in the past week.
- Technology breaks pivot area/support from April-August
- Intermediate-term market breadth starts to roll over meaningfully. At present, more than 75% of all stocks are above their respective 200-day moving averages. Coppock curve along with percentage of stocks within 20% of 52-week highs has shown no meaningful deterioration.
- Evidence of a sharp rally in Treasury yields and US Dollar could be important and a temporary negative. The decline over the last 4-5 months in both DXY and TNX has directly coincided with a big rally in risk assets. If the Dollar starts to back up meaningfully, this might correlate with stocks losing ground. (At present, USDJPY is still pulling back and Treasury yields have declined precipitously in recent days, and still look to move lower.)
- Sentiment growing more bullish would be a negative. The last month of rally in US indices since the 8/5/24 lows directly coincided with sentiment starting to grow more optimistic. AAII Bulls/Bears has expanded to show two straight weeks of above 50% Bulls, while Fear and Greed also shows readings having moved to “greed”. However, the last few days could be causing this to change a bit. The Equity Put/call ratio has been bouncing sharply lately coinciding with the outsized move in VVIX (VIX of the VIX) and at 0.73, is largely mid-range, not too bullish nor bearish.
- Cycles show a possible short-term rally into mid-September, near this month’s FOMC meeting before a late month decline gets underway which would gel with seasonality trends. If a decline starts to take hold, then a 50-61% decline to the rally from early August might materialize. At present, I’m inclined to believe that August lows should hold.
- Short-term market breadth starts to show multiple days of negative breadth on rallies into mid-September; Conversely, if this week’s minor decline starts to happen with much larger negative breadth of 5/1 or greater. (Short-term concern, but one which normally can happen near a market peak.)
- If USDJPY breaks 140 and evidence of Carry-trade unwinding begins again in larger fashion, in a way that might spook other asset classes, such as Treasury yields which begin to decline in a quicker fashion than lately.
- If High Yield bonds start to show much greater evidence of deterioration, as thus far, most High Yield corporates have held up quite well vs. Investment grade corporates.
- If the recent strength in other non-Technology groups starts to fade meaningfully, (specifically Financials and Healthcare, which are #2 and #3 within SPX by capitalization and just hit new all-time monthly highs) this would likely be a concern for markets.
Overall, these listed above are but a few things that I normally look for, outside of just actual price and momentum-based deterioration. At present, the rebound from August lows has been fairly robust and specifically given the broad-based move in many sectors back to new all-time highs, it remains difficult to have many worries just yet. But if cycles, sentiment, seasonality and actual sector weakness start to indicate a larger decline might be upon us, I’ll certainly start to address it.
Technology Part 1- Tech underperformance has failed to result in any breakdown, despite recent wobbles.
This one-year daily chart of Technology vs. the SPX shows the recent stumble in Technology from mid-July. As can be seen the first half of the year has been above-average for Tech outperformance, while Tech has slumped since July.
Until/unless Tech, relatively speaking, breaks the area at April and August lows (which bottomed near a similar spot relative to SPX) then I’m inclined to be bullish.
Furthermore, DeMark’s TD Buy Setup triggered a Buy Setup on Wednesday’s close for RYT vs. RSP 1.91% (Equal-weighted Technology vs. Equal-weighted S&P 500)
The key takeaway below is that Technology has not violated support and remains healthy, despite the technical underperformance since July. Furthermore, now there is evidence that Tech might be bottoming and could outperform in the weeks ahead after Wednesday’s above-average performance on a lackluster day for SPX performance. We’ll know the answer to this likely by Friday’s close.
Equal Weighted Technology vs Equal Weighted S&P 500
Source: Symbolik
Technology part 2- Intermediate-term trends for Technology remain in good shape
This is the same relative relationship highlighted in the past chart, but from a longer-term perspective.
As can be seen on weekly charts since 2019, Technology has formed a bullish base vs. SPX in equal-weighted terms, broke out into mid-2024, and now has given a bit of this back to get near the all-important signal line.
Until/unless this pivot area of the breakout is violated, (meaning that April and August lows in Tech vs SPX are undercut) than Technology remains an Outperformer and most certainly a technical Overweight.
However, if this does start to give way next month ahead of the Election, then I would suspect Tech weakness could persist until the Election. (Note, this also likely would result in Small-cap outperformance vs. large-cap Tech)
For now, I don’t view this chart all that negatively, as it’s merely consolidating post breakout. I’ll review some of the sub-sectors within Technology in the days and weeks ahead.
Equal Weighted Technology vs Equal Weighted S&P 500
10’s-2’s curve challenging the 0 line after massive dis-inversion
10’s-2’s curve is dis-inverting back to positive territory for just the 2nd time this year following one of the longest inversions ever. (This happened briefly back on 8/5, but was unable to hold.)
Weak JOLTS data from Wednesday looks to be pushing a bull steepening of the curve as it provided more evidence of weakening in the labor market with vacancies falling to a lower than expected 7.673 million, the lowest since Jan 2021.
Overall, this data is consistent with a slackening of labor market conditions. Technically one can make the case for further steepening here given the quickness with which this yield curve has re-steepened back to near early August highs. Getting above this level is also important given that the yield curve bottomed in 2019 and also from 2006-2007 near these levels and now is being tested. Thus, exceeding +1.4% would argue for a much larger move higher in steepening, as former support which should now represent resistance has been surpassed.
(Note, I had shown a Yield curve chart on Wednesday afternoon in Flash Insights which was shorter in duration. However, this monthly chart really helps to clarify why a move back to positive territory could show much further steepening given that two prior lows will have been surpassed.)
Overall, this level looks very important technically, and given that the market is nearing potentially 250 bps in rate cuts into next July (as shown by the Swaps market (WIRP on Bloomberg) than a much further decline in 2 year yields should commence, and continued steepening happens into end of year.
US Sell 2 Year & Buy 10 Year Bond Yield Spread
