Market Review Oct 26th 2023 ( 10Y yield hover around 4.8, Cap-weighted market sell off for 2 consecutive day )
10Y yield hover around 4.85% and DXY is still high, benchmark US stock indices sell off for 2nd day in a row( Nasdaq 100 drop 1.89%, S&P 500 drop 1.18%, DJIA fall 0.76% ) . Oddly enough, Equal-weighted SPX & NDX Only fall by 0.11% and 1.11% respectively. Small and mid cap, rise by 0.48% and 0.31% respectively. So equal-weighted , Small and Mid cap outperform Cap-weighted counterpart on Oct 26, but 1 day does not make a trend . ( Minimally we need equal weighted, , small, mid cap outperform/perform as well as Cap-weighted on consistent basis to repair the breadth destruction )
There is no extreme readings ( fear exhaustion sign ) in the ARMS index, NYSE Decliner-advancer ratio or NYSE DOWN/UP volume ratio. So , no conviction that a low is in place yet.
Absent the Extreme readings in selloff exhaustion sign, we will likely need presence of panic buying sign, high NYSE Advancer-decliner ratio, 90% UP volume day ( or back-to-back 80% UP volume day )
Selloff Scenario 1 ( from my weekly market review Oct 16 -20th entry ) applies. Even after market bottom is in place, following conditions apply for reversal/start of new bull rally to be taken seriously,
Condition 1: 10Y bond yield close below 4.5 - 4.6 ( alternative scenario : Stock sensitivities/correlation to 10Y yield has to drop, but there’s scant evidence of this happening )
Condition 2: SPX rise above 4280 , previous swing high ( above session high before Powell hawkish 19 Oct speech )
Conditions 3: VIX stay below 20, MOVE index stay below 130 consistently ( the lower the better )
Condition 4: Nasdaq 100, in particular Tech sector XLY/communications has to outperform all other sectors and lead a broad based rally (need upward breadth thrust )
Where upward breadth thrust ( panic buying sign )are defined as follows,
1) broadbased market rally or
2) big NYSE buying volume ratio or
3) big NYSE advancer vs decliner ratio
There is an old adage, Nothing good happens below 200-day Moving average. As many sectors have already gone down below 200Day MA, it’s appropriate to see which market is still above 200 Day MA. ( hint : down to the usual leadership/Offensive sector, i.e Tech / Semiconductor / communications only )
Nasdaq 100
XLK, SMH, XLC
Can Technology , Communications and Semiconductors revive the Stock market and lead other sectors to rally in the days and weeks ahead ? These sectors are the only hope left, if they are gone, then bloodbath await the broader stock market.
Let’s review the S&P500
S&P 500
It’s edging ever closer to the 61.8 Fibonacci retracement, 4110 is the line the sand.
The decisive trump card ( 10 year treasury note, TLT, Dollar index )
Since Bond market is the ground zero for market instability, their chart & price will go a long way in deciding stock market fate.
10year Treasury note and TLT
There isn’t much changes in chart, reader can refer to previous entry for the chart ( market weekly review Oct 16 -20 ). There is a potential MACD divergence, however BEFORE the MACD divergence can be confirmed, the 10 year treasury note and TLT price has to stop falling.
Dollar index
Stock slide , VIX still above 20 and Dollar index still high, enough said. Dollar index drop ( below 105 ) and VIX fall ( below 20 ) are sorely needed to help the market.
An update on the Things that I don’t like ( Charts that suggest bearish odds )
Junk bond and 10-Year yield
10-year yield hover around 4.85. Junk bond recover, but still need to monitor over next few days to assess extent of market damage, or any signs of selloff acceleration/recovery.
If 10Y yield rise above 5.1 again , and junk bond sell off by breaking new low, then stock sell off will continue.
MOVE index
Move index is still high at 130.94. ( High MOVE index increase bond haircut, causing a reduction in collateral value of bond, which leads to lower fund available for market making/investment/trading, thereby reducing market liquidity. )
Flattish NYSE Advancer vs Decliner ratio on Oct 26( absence of extreme fear or panic buying )
Monday Oct 23, 2.82 to 1 NYSE Decliner vs Advancer ratio
Tuesday Oct 24, 2.30 to 1 NYSE Advancer vs Decliner ratio
Wednesday Oct 25, 2.98 to 1 NYSE Decliner vs Advancer ratio
Thursday Oct 26, 1.11 to 1 NYSE Advancer vs Decliner ratio (1508/1355 = 1.11 to 1)
% of SPX stock above 50days and 200 days MA
Overall breadth is bad
percentage of SPX Stock above 50days MA, drop from 35% to 15.2% ,
percentage of SPX Stock above 200days MA, drop from 44% to 28.4% ,
We will monitor & assess this breadth measure in the coming days
Mid&Small cap, equal-weighted chart is still far below 200Day MA
Mid & Small cap and equal-weighted SPX NDX Indices are still far below 200Day MA, and underlying breadth destruction is still ongoing.
Transportation & Homebuilder ETF ( XHB )
Transport sector is closely watched because it is an important signal in Dow Theory to confirm the rise/fall in DJIA / XLI index and over health of industrial sector while Housing sector is 12% of US economy. Transportation sectors and Homebuilder sector ETF XHB broke & closed below 200Day MA for many sessions. the longer it stay below 200D MA, the more concerning it becomes.
The only saving grace ( charts that doesn’t seem to suggest bearish odds )
Equal weighted technologies (RSPT) vs Equal weighted SPY (RSP)
Despite the sell-off in SPX for the past 2 months, Equal weighted technology vs equal weighted SPY chart still maintain its upward sloping shape, hinting at money rotation into technology sector.
NYSE McClellan Oscillator ( BORDERLINE )
SPX made a lower low, but NYSE&Nasdaq McClellan Oscillator is still making a higher low ( BORDERLINE ), potential divergence in development, signalling that breadth deterioration is less bad underneath the surface.
But it’s still FAR from conclusive, verdict is not yet out, will observe again for few more days
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.
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