Mid-week market update: I pointed out on the weekend that it’s not unusual for the S&P 500 to consolidate sideways after reaching its upper Bollinger Band before the market makes its next major directional move. There have been five other similar instances in the last six months. What’s a little unusual about the current episode is the length of the consolidation.
Even though the S&P 500 remains in its narrow consolidation range, the odds point to a shallow correction, as the daily stochastic has recycled from overbought to neutral, which is a sell signal. Initial SPY support can be found at 520-525, and secondary support at 505-510, based on volume by price analysis.
Narrowing leadership
Here’s what is bothering me. Even as the S&P 500 advanced, leadership was narrowing and it wasn’t broadening out.
Market leadership had become AI and NVIDIA and virtually nothing else. The technical condition of the Semiconductor Index as a proxy for AI plays appears precarious. On an absolute basis (top panel), the index staged an upside breakout and it’s pulling back to test its breakout turned support level. On a relative basis (bottom panel), it was rejected at an intersection of relative resistance levels, which is concerning.
I am also seeing a number of bearish cross-asset signals. Yesterday’s poor Treasury auction didn’t help risk appetite. The 7-10 year Treasury ETF (IEF) broke a key support level today. The USD is strengthening and testing a key resistance level, and oil prices are rallying. These are all signs that point to a risk-off environment.
A crowded long
In addition, analysis from the Leuthold Group showed that “commercial hedgers” in the S&P 500 e-minis, who are generally regarded as the “smart money”, have a short position similar to levels before the last major correction in early 2022. An interpretation of flip side of this coin is a crowded long by the “dumb money”, which would be contrarian bearish.
A modest correction
SentimenTrader is calling for a modest correction after last week’s downside break, which was the day my inner trader took profits in his long S&P 500 positions.
I agree with the modest correction call. Two of the five bottom spotting indicators in my Bottom Spotting Model are close to a buy signal. It wouldn’t take much of a market downdraft for the VIX Index to spike above its upper Bollinger Band, and the NYSE McClellan Oscillator (NYMO) is very close to an oversold reading.
Perhaps the PCE report could provide a catalyst on direction. Either way, don’t panic and get ready to buy the dip.
4 thoughts on “A modest correction ahead?”
Here are my last blogs:
May 22, 2024 at 2:07 pm
Who me worried?
There seems to be a disconnect between the economic news these days and the stock market. Witness retail sales, home sales, consumer confidence etc. are all coming below expectations. As we have been told many times there is a lag between an inverted yield curve and a recession. Therefore, however small the probability it cannot be ruled out.
On a technical basis I have a different take unfortunately than Cam. Even after Nvidia’s earning SOXL has not made a new high. The Transportation Index has broken down, the number of stocks in the SPX has dropped from 85 at the previous high to 65. Add to that the recent strength in the dollar. There have been many occasions in the past where an index makes a new high above the previous high i.e. a double top, and breaks down.
Put me down as cautious but not ready to short the market. However, if I did, the Dow and the Russell would be my choice.
May 26, 2024 at 5:05 am
It depends on which Index you use to measure the health of the market. There are five: S&P 500 (SPX), Nasdaq 100 (qqq), Dow Jones (DJI), Value LIne (VTI) and the New Composite (NYA). Of the five three are showing signs of distribution : DJI, VTI and NYA. The other two are being held up by the Fab 5 or 7 stocks.
Interest rates are at an important turning point. If you believe yields are in a bull market this would be the time and place for them to turn back up.
Life would be very simple if just followed technical indicators. Some time it is better to look under the hood.
PE ratios are high, valuations are close to extreme. The stock market is held up by a few stocks. The equal weighted index are not showing strength. Take a look at individual stocks like Home Depot etc..It tells a different story.
I did short the Dow Jones Index. I traded the SDOW,
It really is hard to tell. I have been fearful for a long time, but we are in a sovereign debt crisis…even if we don’t know it yet.
Currency will be devalued, whether it be Zimbabwe or Weimar Germany where the stock markets did great.
What happens if smart money capitulates in its short position? We get a massive GME style move? I don’t know but I stopped trying to be smart long ago…just look at prices.
The problem is if prices go parabolic to the upside we get greedy and don’t want to start edging out of our positions. The S&P might see 7500 and 1500 before the decade is over.
The good thing about buying something like SDOW is the worst it can do is go to zero, so it’s safer than an out and out short. I take short positions in futures and forex but it is nerve wracking…I do micro positions, it helps me focus on trends…which can be helpful if you want to write puts.
I’ll keep an eye on SDOW, thx.
The simplest and very profitable trades in market is short 3x and 2x bear funds, and 2x vol funds. If you are patient and disciplined, the win rate approaches 100%. All you need is to start shorting at overbought levels and wait for it to come down quickly. By design these products are forever declining in price over long stretch of time which is not during a crisis. Never buy and hold them for extended periods. A year like 2024 will have several corrections due to interest rate expectation fluctuation. By extension their puts at reasonable cost can be considered.
Agreed, My holding period is about 1-8 days,
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Here are my last blogs:
May 22, 2024 at 2:07 pm
Who me worried?
There seems to be a disconnect between the economic news these days and the stock market. Witness retail sales, home sales, consumer confidence etc. are all coming below expectations. As we have been told many times there is a lag between an inverted yield curve and a recession. Therefore, however small the probability it cannot be ruled out.
On a technical basis I have a different take unfortunately than Cam. Even after Nvidia’s earning SOXL has not made a new high. The Transportation Index has broken down, the number of stocks in the SPX has dropped from 85 at the previous high to 65. Add to that the recent strength in the dollar. There have been many occasions in the past where an index makes a new high above the previous high i.e. a double top, and breaks down.
Put me down as cautious but not ready to short the market. However, if I did, the Dow and the Russell would be my choice.
May 26, 2024 at 5:05 am
It depends on which Index you use to measure the health of the market. There are five: S&P 500 (SPX), Nasdaq 100 (qqq), Dow Jones (DJI), Value LIne (VTI) and the New Composite (NYA). Of the five three are showing signs of distribution : DJI, VTI and NYA. The other two are being held up by the Fab 5 or 7 stocks.
Interest rates are at an important turning point. If you believe yields are in a bull market this would be the time and place for them to turn back up.
Life would be very simple if just followed technical indicators. Some time it is better to look under the hood.
PE ratios are high, valuations are close to extreme. The stock market is held up by a few stocks. The equal weighted index are not showing strength. Take a look at individual stocks like Home Depot etc..It tells a different story.
I did short the Dow Jones Index. I traded the SDOW,
It really is hard to tell. I have been fearful for a long time, but we are in a sovereign debt crisis…even if we don’t know it yet.
Currency will be devalued, whether it be Zimbabwe or Weimar Germany where the stock markets did great.
What happens if smart money capitulates in its short position? We get a massive GME style move? I don’t know but I stopped trying to be smart long ago…just look at prices.
The problem is if prices go parabolic to the upside we get greedy and don’t want to start edging out of our positions. The S&P might see 7500 and 1500 before the decade is over.
The good thing about buying something like SDOW is the worst it can do is go to zero, so it’s safer than an out and out short. I take short positions in futures and forex but it is nerve wracking…I do micro positions, it helps me focus on trends…which can be helpful if you want to write puts.
I’ll keep an eye on SDOW, thx.
The simplest and very profitable trades in market is short 3x and 2x bear funds, and 2x vol funds. If you are patient and disciplined, the win rate approaches 100%. All you need is to start shorting at overbought levels and wait for it to come down quickly. By design these products are forever declining in price over long stretch of time which is not during a crisis. Never buy and hold them for extended periods. A year like 2024 will have several corrections due to interest rate expectation fluctuation. By extension their puts at reasonable cost can be considered.
Agreed, My holding period is about 1-8 days,