Still Waiting for a Capitulatory Low
As clients know, SPX 4218.70 was one of my short price targets given over the past few weeks. We tagged Tuesday of last week then digested that level for four days! Wednesday and Thursday of last week I saw net selling slow and turn around, while "the rate of descent in breadth destruction is slowing". Then strong volume came in Friday Oct 6th - before the news of the Middle East War breaking out this past weekend. Monday I pointed out that NET BUYING had been picking up which supported the strong bounce we had from SPX 4232 into 4376 - which was muted compared to the strong move in QQQ from $355 to 373.74.
I credited that move to a number of factors, as posted Tuesday morning in #trading-room-notes :1. WAR -"buy the cannons, sell the trumpets" is sadly the mantra that market veterans know too well.
2. DELTA HEDGING - all those LIFO option puts just expired worthless on market makers bidding up the underlying.
3. PERCEIVED FED PAUSE - market algos trading off Fed-head-speak, excited no more fed hiking headwinds.
4. SEASONALITY - Stats & Sentiment start the engines, but organic buying has to show up to make it follow through.
5. FALLING USD + 10Y - which is the macro-to-micro I often teach/trade for clients.
But all the while I was live commentating that I did not expect it to stick IF DXY held $105.77 and my USD/10Y stayed above 300. My added confidence wasn’t in the failed 30Y Treasury auction today or the hot jobless claims, CPI or PPI this week. It was always MARKET BREADTH.
When market breadth turns south, LIKE IT DID AUGUST 1ST, savvy investors know that it’s time to remain cautious.
Until market breadth can confirm a turn north, WHICH IT HASN’T YET, savvy investors know to stay cautious.
Here are some of my TELLS which keep me from calling a "SAFE SWING LONG":
PMOBUYALL is still basing while rallies are sold:
OEXA200R shows that SPY 100 breadth is still falling but doesn’t show signs of capitulation - not in absolute levels or given MACD and Stochastics (lower panels). I will wait, thank you.
SPX PMO is still is bear market bounce territory. After clearly showing a roll-over August 1st, this indicator (bottom panel) has continued to base under "0" and is still at risk of revisiting the range of possibilities showing $4000. I realize we have had a strong bounce since Oct 3rd, relatively, but I am not convinced as long as we are below that "0" line.
VVIX:VIX is a ratio that simply removes noise of intraday volatility. It trends higher (higher highs and higher lows) when market is trending up and does the opposite when trending lower. UNTIL (bottom panel) MACD can get back/stay above "0" level, I will continue to see any bounce as #STR (short the rip).
UST:SPX below is big picture look on the weekly showing that VIX mean-reverts back to its 65W and is due a visit - most likely once it gets/stays above "0" (bottom panel).
NYSE via NYAD and NYHL (chart below) already broke down in a big way back in August. This breakdown should not have happened if the market was healthy under the surface. It is not. As I have explained: MAGNIFICENT 7 strength is really RISK-OFF behavior. The majority of stocks are making new 52 week lows and breaking advance/decline and bullish percent index levels of safety.
And we cannot have a market rally that is DURABLE without strong market breadth.
"USD will make the weather and its rate of change will determine the severity." I have said this a lot over the years. I also often swap out yields for the same saying. ;-) Let’s just say that’s how I came up with my DXY/10Y ratio that I show everyday along with by breadth and net buying/selling indicators. Long story short: DXY has a look for higher on the weekly but hasn’t confirmed. A sustained move higher is a big headwind for equites - especially as it relates to companies who receive a large percentage of revenue from abroad.
[Macro Side-note: I am actually MUCH more worried about when this impulse higher in the DXY ends. I firmly believe that higher yields will pull USD higher while putting pressure on commodities until the the reversal in the DXY lower which may be more important as a tell for economic prospects. It’s too early to discuss, since it hasn’t happened yet, but suffice it to say this HIGHER yield spike I have tracked and timed WELL for literally 3 years! It timed with an historic fall in bonds greater in value than the fall in equities in the Great Financial Crisis! But it will be nothing compared to the US dollar moves I see coming next. Reminder: Rate Volatility begets Currency Volatility.]
IEF:HYG is but a placeholder but let’s just say I see this credit spread ratio moving higher soon as treasuries are a hedge not to equities but CREDIT.
COMPQ:SPX is my monthly reminder that NYFANG, QQQ, MAG7 is at an inflection point! After a well-timed call for the 13 year outperformance in Nasdaq to end (Jan 9th 2022), we had a stunning 35% drawdown before a coordinated GLOBAL Central Bank intervention in October 2022. Since then, mega cap tech has lead all markets, but we are at a channel trendline tag: Above that upper trendline (black arrow) is melt-up; Rejection below then bears watching how it handles the lower trendline (green arrow) as that would confirm that even tech can’t hold investor’s ‘safe-haven' narrative.
COMPQ on a weekly timeframe shows 13000 must hold or else. Bottom panel intonates credit stress is building in HYIOAS.
COMPQ on a daily timeframe shows a similar trendline that formed since the August roll-over - with breadth breaking down much more under the surface (see bottom panels). Regardless, price action rules: Above brings us to $14,500 and below the 200D near $12,500. With earnings coming up next month, and given they have a low-bar to jump over, it will be more about the REACTION to mega tech earnings than the earnings/guidance themselves. I contend they are priced for perfection and investors have held-out in the "safety" of tech plays while rest of market has sold off on higher US yields and dollar.
WTIC bears watching. I have written about this under #swing-ideas to highlight that I am not bullish. Should higher yields push the deflation impulse (lower demand), Oil is a major tell to watch.
Finally, my call for 10Y to hit 4.7% in 2023 occurred, but shockingly, I warned in February that I expected "COMMODITIES roll over even more", that a "deflation impulse will take hold", and that "higher yields will deflate EVERYTHING".
This will need fine-tuning now that we are here, but it bears watching as well.
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