Mid-week market update: I recently pointed out that the S&P 500 was becoming overbought and poised for a consolidation or pullback. The 14-day RSI had reached the overbought zone and the percentage of S&P 500 stocks above their 20 dma exceeded 90%. The market tried to rally today, but failed. Is this the correction?
Corrections can occur in price or time. The market could pull back (price) or the market could consolidate sideways (time).
The case for a sideways consolidation
I am inclined to believe that we are experiencing a sideways consolidation, or a correction in time. In a strong bull market, dip buyers can be disappointed as prices may not correct in accordance with conventional technical analysis techniques. This may be one of those cases. The accompanying chart shows the S&P 500 using one-hour ticks. For much of this year, the market has pulled back whenever the 14-hour RSI reached 90 (red vertical lines) and corrective episodes have reached a minimum of 50. The market achieved that objective yesterday and today even though the percentage above 20 dma remains elevated.
Buy signals everywhere
I am seeing buy signals everywhere. Bloomberg reported a surge of insider buying, though readings are not as strong as the 2020 COVID panic bottom.
As of Monday, almost 900 corporate insiders have purchased their own stock in November, more than double the previous month. While the number of sellers also rose, the pace of increases was smaller. As a result, the buy-sell ratio jumped to 0.54, the highest level since May.
The buying impetus pales next to March 2020, when insider buyers outnumbered sellers by a ratio of 2-to-1 at the exact bottom of the pandemic crash. Still, the bullish stance is a departure from July, when stocks climbed and insiders rushed to dump stocks. That exit proved prescient as the S&P 500 sank 10% over the following three months
Moreover, stock prices are supported by corporate buybacks.
After refraining from buybacks earlier this year, American firms are now embracing them. Repurchases among BofA’s clients have stayed above seasonal levels for three weeks in a row, including one in which a record $4.8 billion was bought, according to data compiled by the firm’s strategists including Jill Carey Hall and Savita Subramanian.
Corporate buybacks will likely be running at $5 billion a day until the market enters an earnings-related blackout on Dec. 8, according to Scott Rubner, a managing director at Goldman, who has studied the flow of funds for two decades. Once the blackout window opens, the flow may drop by 35%, he estimates.
Dean Christians at SentimenTrader highlighted a trading system based on Goldman’s Financial Conditions Index just flashed a buy signal.
Charlie McElligott at Nomura believes that in the absence of a central bank surprise, risk assets likely to grind higher into year-end.
Tactically, Friday December 1 could be subject to bearish seasonality, according to Jeffrey Hirsch. If you’re waiting for an opportunity to buy the dip, this might be it.
My inner trader remains bullishly positioned. 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.
Disclaimer: Long SPXL
I yet feel that any appreciation from here is dependent on interest rates. The market has bought the notion that the Federal Reserve is done raising rates and will now lower them. To reduce interest rates one out of the three things has to happen: a soft landing, a meaningful slow down in the economy or a sharp recession. The market is betting on one of the three scenario.
Everybody has drunk the same cool aid. With excessive crowding in the seven stocks any disappointment will be sharp and painful.
The 493 S&P stocks have gone nowhere in 2023 and they may have been held back in this latest rally with tax-loss selling pressure that usually ends around now.
Confirming this has started, I see the Dow Jones Market Neutral Low Momentum Index up 2% today with its High Momentum up only 0.3%. This is market neutral so there is not a big tilt to Tech doing this. In the market neutral high momentum, are the winning stocks that have weathered the rate rising storm well in each industry sector. The low momentum that just shot up are the laggards in each industry sector.
This could likely mean the market had a TWIST today, amazing as that seems after such a strong market rally.
So, the next phase of this rally will be the broadening out of the party.