Daily Market Review Oct 31 2023 ( Market regain footing, breadth recover from oversold level, morning star pattern in most indices and sectors)
Broader market showed initial signs of recovery from the previous week oversold downtrend. Most US indices& sectors chart show Piercing pattern, Morning star pattern as of Tuesday 31st October market close.
Some Interesting and important facts on the market history,
Fact 1: 2nd times since 1990 to get a Aug - Sept – Oct 3 consecutive negative monthly close (in 1990, after Aug – Oct negative monthly close, market defend 40Month MA and bounce higher without looking back )
Fact 2: 40 months MA was successfully defended in secular Bull market, 1981-2000, therefore defending 40 months MA is an important litmus test for market. ( as opposed to secular bear market, where price stays below 40 months MA for many months )
S&P 500 broke the steepest downtrend line, closed above Dec 2021 high & Oct 2022 low anchored VWAP level.
It’s still feasible for market to bottom without presence exhaustion/selling climax sign, however we need more time to tell whether or not it’s THE BOTTOM.
The following conditions apply for reversal to be taken seriously,
Condition 1: 10Y bond yield close below 4.5 - 4.6
Condition 2: SPX rise above 4280 , post-powell NY Fed speech daily close ( preferably above session high before Powell speech, which is around 4350 )
Conditions 3: VIX stay below 20, MOVE index stay below 120 consistently
Condition 4: Nasdaq 100, Tech/communications sector has to outperform and lead a broad based rally
Not forgetting that there are 2 important event happening today, Treasury announcement (market focus to size and duration mix of the auction ) and Fed decision day (Communications guidance ). Things could changed abruptly and reverse lower if either of them disappoints.
Lead-lag relationship between Indices
Nasdaq 100 & Nikkei 225 broke out of March – May trading range earlier than S&P 500 & Dow Jones Industrial average, therefore Nasdaq 100 & Nikkei 225 (Lead) chart can give us a clue to the upcoming movement of S&P 500 & DJIA (Lag), sort of a lead-lag relationship.
The decisive trump card ( 10Y yield / 10Y note, Dollar index )
10Year treasury yield
There isn’t much changes in 10Y yield, still between 4.8 – 5% range. The negative correlation between 10Y yield-SPX ( currently at -0.57 ), DXY-SPX ( currently at -0.32) still hold and are notable.
If in future, correlation coefficient of 10Y yield – SPX, DXY - SPX breakdown( between -0.1 & 025 ) or goes positive, then market may look past this 2 factors and start to rally.
Dollar index
DXY is still within the 105.5 – 107 tight range, while VIX has fallen to 18 and SPX rose for 2 days in arrow. VIX closing below 20Day MA is a welcome development.
If DXY close above 107 and VIX close above 20 again, market may still retest low /go lower. If DXY close below 105.50 and go lower than 17, then market will likely rally further.
Things which has improved ( but pending further progress)
Notable NYSE Advancer vs Decliner ratio on Oct 27(with heavier NYSE volume)
Friday Oct 27, 2.98 to 1 NYSE Decliner vs Advancer ratio
Monday Oct 30, 2.27 to 1 NYSE Advancer vs Decliner ratio ( 1999/882 )
Tuesday Oct 31, 2.48 to 1 NYSE Advancer vs Decliner ratio (2069/834)
Oct 31 NYSE volume is also far higher than previous week, which is a positive development
MOVE index
Move index close lower at 126.86. ( 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. )
MOVE index can explode higher or fall lower by tonight because of Treasury announcement & fed meeting today
Interestingly, world collateral pool is attempting to carve out a bottom as per data source from Crossborder Capital. We still need to observe further to confirm.
Update on 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, still leaning bearish but still need to monitor over next few days to reach a verdict.
% of SPX stock above 50days and 200 days MA
Overall breadth is still bad even although slowly improving,
percentage of SPX Stock above 50days MA, drop from 35% to a low of 10.6, currently is at 20.6% .
percentage of SPX Stock above 200days MA, drop from 44% to a low of 24.6%, currently is at 31.6% .
We will monitor breadth improvement/deterioration 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 is still bad.
Defensive sector outperformance on 1week basis ( Oct 25-31)
Defensive sector ( Utilities, consumer staples) outperform offensive sector ( Technologies, Communications , Consumer discretionary ) from Oct 25 – 31.
Transportation & Homebuilder ETF ( XHB )
Transportation sectors and Homebuilder sector ETF XHB broke & closed below 200Day MA for many sessions. Recent charts show morning star pattern, we need to observe further to see if it amounts to anything significant.
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, 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 Oscillator is still making a higher low ( BORDERLINE ), signalling that breadth deterioration is less bad underneath the surface.
Again, we cannot stress enough that today is a Crucial Treasury announcement and FED day, every thing that I mentioned today could be completely changed by end of market closing.
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