Mid-week market update: The S&P 500 reached an overbought extreme on the 5-week RSI after nearing the top of an ascending channel and it appears to be in the process of pulling back. In the past, such extreme RSI conditions has seen the market rally stall. There is a strong support zone at about 4200, though it’s an open question whether the index will reach those levels.
Bearish factors
Market breadth, as measured by the performance of an equal-weighted index to a float-weighted index as an apples-to-apples comparison, is still not broadening out. I interpret this to be an intermediate concern.
Another short-term factor to consider is quarterly re-balancing flows. Stocks have risen strongly compared to bonds, Watch for institutional balanced funds to re-allocate by selling equity holdings and buying bonds to keep their asset allocation at mandated targets.
No signs of a liquidity catastrophe
One factor I had highlighted in the past is proving to be benign. The U.S. Treasury is replenishing its Treasury General Account levels by selling Treasury bills and other paper. It is expected that the TGA account could rise by $1 trillion in the next three months. Fears have arisen that the TGA reset could draw significant liquidity from the financial system and create headwinds for the price of risk assets. Based on data published last Thursday, increases in TGA has been offset by flows out of the Fed’s reverse repo account, which is supplying liquidity to the banking system. So far, so good, but it’s only one week of data so bulls should celebrate just yet.
I expect the stock market to see a downward bias into this week and quarter-end. After that, it’s all up to the market gods.
I keep wondering when Vision Fund will make waves, there have been several bad bets, and if it unravels could be a trigger for a decline.
Refinancing debt will eventually be a problem if rates stay up.
Yes, I’m bearish, although things could go much higher before they go down.
Potential H&S with a neckline around 4390 puts target sub 4300