Weekly Market Review Oct 23-27th 2023 part 2 ( Market breadth, various sectors, bond chart )
This is part 2 of weekly market review. Overall, Trend, breadth and momentum is till pointing down, price action should be respected, maximum caution is warranted, scenario planning in part 1 is a mental exercise that should only be acted upon only if price action permits.
A recap of crucial technical levels,
The following listed levels are the battleline in the coming week,
2023 March low to 2023 July High
61.8% Fibonacci retracement : 4110
October 2022 low to July 2023 High
50% Fibonacci retracement : 4050
61.8% retracement : 3920
Anchored VWAP
Dec 2021 High ( 4818, highest close of SPX ): 4150
Oct 2022 Low(3491, Oct 2022 low of SPX ) : 4141
Mid Feb 2020 Prepandemic Swing high : 3940
mid march 2020 pandemic swing low : 3895
200Week MA
SPX 3940
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.
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 120 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 )
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
Surprisingly in stockcharts.com the 10yearT-note and TLT price charts remain unchaged ( maybe there’s an error ), 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 is falling while VIX is still still in 20-22 vicinity and Dollar index still around 105.50 -107 range, enough said. There are 2 interpretations,
Interpretation 1: market haven’t seen the worst, more decline is coming
Interpretation 2: market is scaring itself over nothing.
More time is needed to reach a conclusion.
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 remain unchanged, 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 129.16. ( 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. )
Notable NYSE Decliner vs Advancer ratio on Oct 27( 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
Friday Oct 27, 2.98 to 1 NYSE Decliner vs Advancer ratio
% of SPX stock above 50days and 200 days MA
Overall breadth is horrendously bad
percentage of SPX Stock above 50days MA, drop from 35% to 10.6% ,
percentage of SPX Stock above 200days MA, drop from 44% to 24.6% ,
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.
Defensive sector outperformance on 1week basis ( Oct 23-27)
Defensive sector ( Utilities, consumer staples) outperform offensive sector ( Technologies, Communications , Consumer discretionary ) from Oct 23 – 27.
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, 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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