Mid-week market update: I had been expecting a choppy January for stock prices, and current market action has not disappointed. Investors came into 2024 all bulled up, but rising rates eventually spooked stock prices. It all came to a head with Fed Governor Waller’s speech, in which he stated that the Fed is pivoting to an easing cycle, but the market expectations may have gotten ahead of themselves.
The S&P 500 has weakened into a support zone, while the 10-year Treasury yield is nearing a resistance zone.
Here are some reasons why I believe that the market will experience a shallow correction.
Bottoming signals
I had written that one of the conditions for a market bottom would see breadth, as measured by new highs-new lows, turn negative. They finally turned negative yesterday (Tuesday).
As well, two components of my Bottom Spotting Model have flashed buy signals. The VIX Index spiked about its upper Bollinger Band, and the NYSE McClellan Oscillator (NYMO) has fallen into oversold territory. Historically, the market has bottomed soon after two or more components flashed buy signals.
Independent from my analysis, Rob Hanna at
Quantifiable Edges tweeted that his Capitulative Breadth Indicator (CBI) reached 11 yesterday, which is above the threshold of 10 for a buy signal. I would expect that today’s market weakness would push CBI even higher into buy territory.
Putting it all together, the latest bond market tantrum has rattled investors and sparked a risk-off episode. Short-term bearish psychology looks overdone and stock prices are poised for a bounce. The narrative is likely to turn from a focus on top-down macro conditions to the results of earnings season, which will begin in earnest next week.
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At the end of last year I felt that both yields and the dollar had reached an extreme and that there was a likelihood of a counter trend rally. I also pointed out that there was a non confirmation based on the Dow Theory in a subsequent note. Today, the Transportation Index made an intra-day new low – lower highs and lower lows. It will be interesting to follow in real time if it means anything. The Transportation has support about 5% below these levels.