Daily market review Dec 6 2023 (Mid & small cap , equal-weighted outperform cap-weighted, market in consolidation, breakdown of DXY-10year yield positive correlation )
Sorry to all the readers for deviation of usual publishing time of my review ( 10pm - 12am US eastern time ), my schedule is busier than usual lately and usual relationship between different instruments are a bit murkier during consolidation period. Therefore more time is needed to examine the relationship between them and contemplate the road going forward.
But rest assured that I will still stick to my usual high standard for every piece that I Published.
Broad market overview
Even though it’s an overall (minor) down day, Mid & Small cap and Equal-weighted are outperforming Cap-weighted counterpart. All these continue to show participation is broadening among different sectors.
Breakdown of Positive correlation between Dollar Index and 10Year Yield.
Just want to point out an interesting relationship recently, 10 year yield has been going down ( 4.35 to 4.12 ) but Dollar has been going up (102.40 to 104 ) for the past few sessions indicating some sort of breakdown in positive correlation between the pair.
Correlation wax and wane, when US Dollar and 10 year yield is going up together, it normally mean the financial condition is tightening or some other factor is causing a risk off mood, and Equity will have downday in the near term.
But how about when US Dollar and 10 year yield are going in the Opposite direction, it’s happening right now and happened several time in the past. A few observations upon examining past few occurrences of such behaviour,
1) Correlation between USD and 10Y yield peak and then goes down
2) Equity consolidated and rose subsequently in every period, except for 1 occurrence during August – October period which did not happened in aforementioned way.**
And for that 1 occurrence during Aug – Oct period, there were other factors causing market to retraced /corrected more than usual, reasons are down to the following ( I may have reveal too much insider secret… )
1)Tightening of financial conditions via 10Y yield Spike.
2) Summer doldrum ( September Q3 window dressing )
3) Systematic fund de-risking ( selling flow of Vol targeting fund, and CTA )
4)Negative Gamma regime ( Volatility magnified by selling of Index futures/individual Stock from Options dealer due to delta hedging behavior )
Charts suggesting further upside in mid to long term
According to Willie Delwichie, if there’s a quiet stretch of period in the market, ( quiet is defined to be absence of 1% day ) then the market breadth ( and subsequent returns ) will strengthen in the future . ( where market breadth = new high minus new low )
And indeed if we look at new high – new low, we still have quite long runway before arrival of next cyclical bear market.
1 research cautioning consolidation in the near term ( Dec 8 – 15 )
According to research done by Famous quant advisor, Wayne Whaley, between period of Dec 8 to 15, SPX and Nasdaq will have the following win-lose % and return %
SPX
Winning ratio: 40%
Avg Returns : - 0.47
NDX
Winning Ratio: 35%
Avg returns : -1.09
Let’s review the indices.
Nasdaq 100
As technology and semiconductors has been leading the market in 2023 so far, we need to look at their chart to gauge market movement.
Currently, 5day EMA and 21day SMA are very close together, If NDX 5 day cross below 21 day MA, there could be further retracement ( suspected to be institution selling to shakeout some weakhand, or tax loss harvesting )
Technologies, Communications, Semis and Consumer discretionary are around 20/21Day MA.
S&P 500
2 scenarios going forward
40% chance of Correction in time : market stall while other sector (ex tech, semi and offensive sectors ) take over leadership. And Subsequently, technologies lead another round of broad market rally again .
60% chance of Correction in price : slightly deeper retracement of 3-5% ( where 5 EMA cross below 21day MA , albeit briefly )
MOVE index
MOVE index closed at around 125, index is indeed consolidating when move goes above 120level ( even though 10y yield is at 4.12 by Wednesday market close). In the mid – long term, would like to see it moving closer to 100 in the coming month. ( Lower MOVE index decrease bond haircut, causing an increase in collateral value of bond, leading to more fund available for big institutions, thereby increasing market liquidity. )
NYSE market internals
Tuesday Dec 5, 2.34 to 1 NYSE Decliner to Advancer ratio ( 1994/853 )
Wednesday Dec 6, 1.04 to 1 NYSE Decliner to Advancer ratio ( 1448/1395 )
Sector performance on 1 week basis
On 1 week basis, Finance and offensive sector (Technologies, Consumer discretionary) are underperforming of Defensive sectors ( Consumer staples and utilities ). Only industrial are outperforming defensive sectors, which suggest that market is in consolidation mode now.
Charts that hint at continuation of consolidation
10Year Yield (TNX)
10Y yield closed near 4.12%, may retest broken support zone 4.25 – 4.3% , SPX is indeed consolidating now. We will see if it stall here or pull back a bit further.
Junk bond press higher after gapping up a few days ago, Junk bond movement could offer clue to Stock indices very near term movement
% of SPX stock above 50days MA
Market breadth is very solid ( but getting nearer to too solid for % of stock above 50days MA)
percentage of SPX-Stock above 200days-MA, currently at 63.4% .
percentage of SPX-Stock above 50days-MA, currently at 81.2% . getting close to oversold level, conditions are ripe for market pullback. If pullback/consolidation doesn’t happen immediately, then market likely will run up to high 80% or even 90% before consolidation/pulling back sets in.
NYSE McClellan Oscillator
SPX made a higher high, but NYSE&Nasdaq McClellan Oscillator is still making a lower high, divergence is developing at the moment, signalling that breadth is less good underneath the surface. We will observe a few more days for the degree of pull back
Bottom line
Near term : consolidation ongoing – degree of pullback is anyone guess (shallow/deep)
Mid term : bullish
Long term : bullish
As always, we will continue to monitor the charts, assess the bullish/bearish evidence day-by-day to make appropriate capital allocation and investment decisions.
Disclaimer : The information presented here are for research and education purpose only, and does not constitute investment advice, trading recommendation, author shall not liable for any action taken by any individual/company with regards to the information presented here or any part of the website - https://marketcycleedge.substack.com/