Mid-week market update: I have been saying for several weeks that the stock market is vulnerable to a setback but it is a bifurcated market. Value stocks have held up well, but growth stocks were getting smoked. The bears finally broke through this week and they are showing signs that they are seizing control of the tape. Defensive sectors are exhibiting signs of relative breakouts against the S&P 500.
Time for a pause
Taiwan announced limits on crowds, following Singapore’s move to restrict foreign workers, in a wave of new restrictions in Asian countries trying to stamp out small outbreaks after months of keeping Covid-19 contained.
The new curbs prompted fears that economic growth could stall out, leading to stock sell-offs in both countries this week. Low vaccination rates in both countries are contributing to concerns that their populations could be vulnerable if faster-spreading variants take hold.
Singapore — the city-state that is ranked the best place to be in the coronavirus era by Bloomberg’s Covid Resilience Ranking — has also been tightening up restrictions amid a sudden recurrence of local infections, limiting social gatherings and upping border curbs. The co-chair of Singapore’s virus task force, Lawrence Wong, said Tuesday that companies looking to bring in foreign workers from higher-risk nations could face delays of more than six months because of the greater vigilance. The country has also begun mass testing all hospital staff in an attempt to fence off infections, after a cluster of cases emerged at a medical center.
Elsewhere in Asia, cases are also coming back, with India now the epicenter of the global crisis, recording more than 329,000 new cases Tuesday. Malaysia is tightening curbs on people’s movements across the country after daily cases exceeded 3,000 this month for the first time since February.
The detection of the one case with Indian Covid-19 variant has added to the risk, and Malaysia is struggling with the pace of vaccinations. Less than 3% of the population had completed their vaccination series as of May 9, data compiled by Bloomberg show. That tally trails Indonesia and Singapore, and puts Malaysia at risk of falling short of its vaccination target for the year.
The burst of gains and push to new highs early on Monday was reversed during the session, causing a spike in the number of stocks suffering a buying climax. This is triggered when a stock hits a 52-week high then reverses to close below the prior day’s close, potentially a sign of exhaustion among buyers.
Our Backtest Engine shows that this is the 6th-largest number of climaxes in a single day since the inception of SPY.
Every time more than 95 stocks suffered a buying climax, the S&P 500 showed a loss over the next 1-2 months. There were few losses over the next 6-12 months, and they were relatively small.
Where’s the bottom?
- The 5-day RSI is flashing an oversold reading, which is the first sign of a bottoming process.
- The VIX Index has spiked above its upper Bollinger Band, which is also a short-term oversold indicator for the stock market.