Guideposts to a deeper pullback

Mid-week market update: The S&P 500 hasn’t seen a 2% pullback since the rally off the November bottom, but is a deeper pullback starting? Stephen Suttmeier at BoA wrote that the index is testing an initial objective in the 5200s, with further upside in the 5600s. This would be an ideal spot for the market to pause.



Here are some guideposts to a deeper pullback.



Teetering on the edge

I have been seeing a number of indicators that are teetering on the edge of a bearish impulse. The S&P 500 is testing a rising trend line that stretches back to November even as breadth has failed to broaden out.



The semiconductor stocks, which are proxies for AI related leadership, have been testing the bottom of their upward sloping channels both on an absolute and relative basis. The Taiwan earthquake is likely to see some degree of disruption of semiconductor supply chains and that event may have pushed this leading group over the edge.



While the semiconductors represent the growth extreme of the market spectrum, the regional banks are at the value end. These stocks have been weak and they are once again testing relative support. A break could be the signal for a disorderly risk-off stampede.



The latest monthly AAII asset allocation survey tells the story of a crowded long. The monthly AAII asset allocation survey is distinctly different than the AAII sentiment survey. The former asks respondents what they are doing with their money, while the latter asks what people think of the market. Equity risk appetite is nearing the peak levels of 2018 and 2021, which marked intermediate-term market tops. As a reminder, sentiment models are condition indicators of risk and they aren’t actionable trading signals – that’s why I categorize sentiment in the “teetering” category.




Bearish tripwires

By contrast, here are some bearish tripwires that have been triggered. The 10-year Treasury yield as pushed up past a key resistance level, which should put downward pressure on stock prices.



I pointed out on the weekend that the IPO ETF struggled against relative resistance and turned down, indicating the exhaustion of animal spirits. The relative retreat has continued. Past episodes has seen the S&P 500 experience price weakness.




Can momentum regain its mojo?

Will investors see a deeper pullback or correction, or will a rotating leadership bail out the S&P 500? I am conflicted between the first part of Bob Farrell’s Rule #4, “Exponential rapidly rising or falling markets usually go further than you think, (but they do not correct by going sideways)”, and Rule #9 in response to the cacophony of analysis about how momentum begets more momentum: “When all the experts and forecasts agree, something else is going to happen”.


One key indicator to watch is the price momentum factor. Different momentum ETFs are exhibiting different degrees of minor weakness. It’s unclear whether momentum regains its mojo, which would be a positive signs for the bulls, or the factor rolls over, which would be the signal for a deeper pullback.



My inner trader remains tactically short the S&P 500. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.



Disclosure: Long SPXU


2 thoughts on “Guideposts to a deeper pullback

  1. This is off topic.
    Interest rates have been going up, TLT is almost 10% off it’s January high, yet gold which has no yield is going up. I am told central banks are buying. Is it possible that some banks are selling treasuries ahead of year end when who knows what will happen, along with financing the federal debt so that a weakening dollar is possible. Add the history of weaponizing the dollar, maybe they want to get less exposed. So buy gold, sell treasuries.
    Why now? Why not of course, but gold has been pushing the 2k for a couple of years. How would central banks buy gold? By selling other assets?

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