Back on April 14 I wrote an article outlining my bullishness of the stock market. Stocks soared and I got my 15-minutes of internet fame.
Now we are nearly four months on and the technical signals are weakening and potential storm clouds are rolling in, I believe.
This shift comes, at least for me, at an interesting juncture. Since the October 2022 low in the broader market averages I have seen a number of developments. At the nadir it seemed like only one analyst was brave enough to say buy -- Tom Lee, Head of Research at Fundstrat and FS Insight. If others were buyers I apologize for not recognizing your skills.
For weeks Lee was either a heel or a hero to traders and investors. As the weeks went by the financial world did not come to an end. Regional banking fears in the March-May time frame did not spill over into a wider market collapse.
Media outlets began to talk about stocks rising against a wall of worry. Morgan Stanley analyst Mike Wilson, a prominent stock market bear, did a sort of 180-degree turn and the market did not have much of a reaction. Now that the second-quarter earnings season for the S&P 500 is getting close to its end we have seen companies deliver enough better-than-expected numbers to keep sentiment generally positive.
The big question in my view right now is whether we're seeing the start of a credit event. The recent U.S. credit rating downgrade by Fitch and the yield curve adjustment by the Bank of Japan could have each triggered a larger change in conditions. The fact that they both occurred within the same one week period could be signaling that conditions are changing.
Bears have continued to point out the lagged effect of interest-rate hikes, rising bankruptcies, the crumbling commercial real estate sector, the manufacturing recession or other similar factors as reasons to be bearish and not bullish. One thing to consider is that 30-year U.S. bond yields that crushed Silicon Valley Bank and most other regional banks due to duration risk are just as high or higher now (Bill Gross asks on Twitter whether the past few months allowed these banks to reduce their duration).
Let's check on some charts.
10-Year Treasury Yield
In this daily bar chart of the 10-Year U.S. Treasury yield, below, I can see a powerful saucer bottom pattern. Yields have made a nine-month bullish continuation pattern. A continued rise in yields for this key maturity could be the reason (if we need to find a trigger) that stocks soon turn lower.
In this weekly Japanese candlestick chart of the 10-Year yield, below, we can see that the longer-term trend is for higher yields. A weekly close above the recent upper shadow should refresh the uptrend.
In this third chart of the TNX I used a Point and Figure chart. Here the charting software suggests a potential yield target in the 6% area.
Who knows? But I doubt if the stock market is discounting a 6% yield at this point in time.
And we should not ignore the 30-Year Treasury yield, chart below.
Dollar Index
I am not sure how the Dollar Index may play into all this but the trend is down for now.
Could the direction of the Chinese yuan or the direction of the Chinese economy create a "tipping point"?
VIX
Technical analysts like to ask questions but don't always have answers.
How about one more possible signal/clue from the VIX (chart below)? Could this be signaling a possible "trend change" as traders shift away from complacency?
Tech Check
The big stock market gains this calendar year have been technology. In this weekly Japanese candlestick chart of the Nasdaq 100 ETF ( QQQ) , below, I can see a chart that could be making a top reversal.
I see a bearish engulfing pattern with a narrowing Moving Average Convergence Divergence (MACD) oscillator along with stalled momentum readings. A bearish or red candle pattern this week would be confirmation of a top reversal. A top reversal signal from the candles can mean a change in trend from up to side or from up to down.
Now, let's review the position of all 11 sectors and see how many are still strong.
Communication Services
In this first chart we examine the Communication Services Select Sector SPDR Fund ( XLC) ETF, below. Prices have made a strong advance from a low in November. Prices are still in an uptrend and trade above the rising 50-day moving average line and above the slower-to-react 200-day line.
The trading volume has been shrinking since March and the On-Balance-Volume (OBV) line has struggled since mid-June. The 12-day price momentum study in the lower panel has been weakening since February.
Consumer Discretionary
In this next chart I look at the Consumer Discretionary Select Sector SPDR Fund ( XLY) , below. Here the chart suggests a pullback or correction is close to starting. Prices made a high in July and have dipped towards the rising 50-day moving average line.
The OBV line has hit a high in July and the 12-day price momentum study has been making lower highs since June telling us that the pace of the advance has weakened.
Consumer Staples
The Consumer Staples Select Sector SPDR Fund ( XLP) ETF is next. Here we can see that prices have been stuck in a sideways trend since December. Prices are just marginally above the 50-day and 200-day moving average lines.
The trading volume has weakened the past two months while the OBV line meanders sideways.
Energy
The Energy Sector ETF, ( XLE) , is next. Here I can see that prices have indeed improved in recent weeks but the pattern does not seem all that impressive. Prices are only slightly above the rising 200-day moving average line and also the 50-day line.
The OBV line is up from its March low point but not setting things "on fire."
Financials
On Real Money Tuesday I wrote about the downside risks for Citigroup ( C) . Let's look at the Financial Sector ETF, ( XLF) , below.
In this daily bar chart of the XLF I see a fading rally. Prices moved up from a March low but trading volume has not expanded. The 50-day moving average has not moved above the 200-day line.
The OBV line is still in a downtrend from February. Momentum is not strengthening.
Health Care
What's up with the Healthcare ETF, the ( XLV) ? In this chart of the XLV, below, I see a struggle to make any upside gains.
The XLV is just a fraction above the 50-day and 200-day moving average lines and the OBV line is pointed lower.
Industrials
Now, let's turn our attention to the Industrial Select Sector SPDR ETF ( XLI) .
Here I can see that the XLI has done well from its lows in September/October but we need to be forward looking. Prices made new highs in June/July and early August but the OBV line did not. This is a bearish divergence and a heads up that the gains may be short-lived.
Another bearish divergence comes from the lower highs in the 12-day price momentum study from June to July while prices made higher highs. The rally in the Industrials has slowed.
Materials
Materials -- the ( XLB) -- is next. The XLB has been unable to break above its early 2023 highs. Prices are above the rising 50-day and rising 200-day moving average lines but that may not last for long.
Trading volume is not expanding and the OBV line has turned lower.
Real Estate
Real Estate -- the ( XLRE) -- is perhaps the weakest link. Prices have been moving sideways for most of the past 12 months. The indicators do not suggest a change in trend to the upside.
Technology
Technology was a big winner in 2023, ( XLK) chart below, but prices are now testing the rising 50-day moving average line. The OBV line looks like it has been "rolling over" in June and July.
The 12-day price momentum study shows us weakness from June to July for a bearish divergence and early warning of a possible decline.
Utilities
Last, the Utilities ETF, the ( XLU) . This is not a bullish picture. I look for lower prices in the weeks and months ahead.
Bottom-Line Strategy
In late 2021 I took what I thought was a bold stance calling for a possible decline to the 3000 zone on the S&P 500. Prices stopped short of that target but on this anticipated decline we may be headed there again despite many believing that the Fed has avoided a recession.
Traders and investors should take appropriation action. Sell calls, sell stock, buy puts, etc. This is not a drill. We may have a window of time until the middle of September, just five weeks away, to "get set up for the next decline."
Stay tuned. Stay nimble.
