Back in July, I was told that the market was down for already existing, There are a number of ways that one can determine whether the market is more likely to go higher or lower, and at the time, I thought Very strongly that we saw the worst sales. Indeed, the VOO ETF (Nyaserka:flight), which tracks the S&P 500, was trading at $346 when that piece was published. It ran in a straight line to $396, a gain of about 14%, before the sale was renewed later. Now the question becomes, am I living up to my “bottom is in” call?
In short, the answer is yes. I still think the bottom we saw in June is Down, but recent action has me more cautious, and more confident now that we are going to reclaim that June low. I think eventually the low will remain, but I no longer feel that way before I thought we would see significant support hold at higher levels.
cause for concern
Let’s dig in with VOO’s daily chart and some momentum indicators.
Firstly, the major trend remains down. I created a trendline that shows the market completely hit the trendline resistance from the all-time high set in January. Until that line is broken, the bears are in charge. For what it’s worth, this line will clearly continue to decline, so the longer it takes to rally again, the easier it should be to reach – and eventually crest – that downtrend line.
Two other things to note on the price chart are support at ~$358 and a June downside correction. The $358 support was breached on Friday not only on an intraday basis but also on a closing basis. I cover the concept of max pain (if you are unfamiliar, you can read about max pain Here) with members of my community, and I was updating them throughout the week regarding maximum pain levels on the S&P 500 and other securities. Maximum pain was after the initial week of sales excess is higher on the indices than the current price, which usually means we see some sort of reversal in the mean. However, what we found was overbought, so the fact that we ended below critical support, And We essentially ignored that maximum pain meant a lot to me. To put it in the context of the game, the bulls had an open target and still missed the shot. We could see a maximum pain-related rally at the start of week 19, but if it does at this point, it appears to be short-lived. Bears are firmly in control at the moment.
Turning to the daily chart, the accumulation/distribution line remains strong, which means we see a downside correction in the morning – opening massive gaps – and then buying throughout the day. This behavior tells me that we are not seeing another massive crash short of time, as there is still big money interest in this market over the long run. If we were to see a drop in the A/D line, I’d be very concerned, but thankfully that’s not the case.
Both the PPO and the 14-day RSI are showing more weakness than I would have liked right now, adding another feather to the bears cap. The PPO failed to support the center line, and is again reduced. The form of the 14-day RSI is very similar, and it simply means that we are seeing more selling – and at a faster rate – than we need. It is not surprising that the crucial support at $358 failed, but the fact that we are seeing this bearish momentum as a breakout of the key support is, again, very worrying.
so what happens now? The June spike low is about 7% lower than here, and there isn’t much in the way of support – in my view – between here and there. Unless we get a huge, bullish rally next week that sees us retesting the $358 level and then some, with better momentum, it is highly likely that we will retest the June lows. going to get from. What happens then will obviously be important (to say the least), but at this point, I’m going to repeat my call that June Bottom was Below
In other words, right now, I believe in two things: 1) we are likely to retest the June lows and 2) that low is going to hold. How confident am I in the face of this ugly sale? The factors that helped us mark the bottoms in the market are telling me that we are not at the beginning of another massive downtrend. In fact, I think we are pretty close to the end of it, and if we retest the June lows, it will probably form a permanent double bottom from which we can rally, just like our indicators Make yourself a bottom.
Let’s take a look at some of the things I see.
The first panel deals with VOO’s 10-year Treasury yield, TNX. We all know that rates are rising rapidly as traders sell bonds, especially at the short end of the curve. But TNX is a medium-term bond that is closely watched, and we can see that the stock’s rolling 20-day correlation to TNX is -0.71. In plan speak, this simply means that rates and stocks are highly negatively correlated. In other words, as yields rise, stocks fall (more or less). As long as this relationship lasts, the direction of rates for stocks is important. We’ll take a look at rates in more detail below.
Next is the second panel, which has the equity put/call ratio, which I have plotted as a 5-day moving average. CPCE is quite volatile from day to day so the 5-day MA smooths out this noise to help us visualize trends better. We can see that the 5-day CPCE ended last week at 0.72, which is a high, but not a panic level. Basically, when this indicator rises, it means that more puts are being bought relative to calls, which is an indicator of bearish sentiment. When it reaches peak levels, it is a highly reliable indicator of bottoms for stocks. The June panic low was in line with a value of 0.81 on the CPCE, and we are certainly not far from it. If/when we do test the June low in the stock, I expect the 5-day CPCE to be somewhere north of 0.80. For me, this will help consolidate June lows low. I would really like to see a CPCE price above 0.81 on 5-day MA basis, which will help cement selling panic levels.
The last three panels are ratios that help investors determine sentiment by plotting major types of stocks against each other. In order, we have Nasdaq stock versus the S&P 500, consumer discretionary against consumer staples, and growth versus value. All of these reflect the correlation between the more aggressive segments of the market with their more defensive counterparts. In doing so, we can see how aggressive Wall Street is with capital allocation. Unfortunately for the bulls, I don’t see much to like here. The good news is that these relationships haven’t seen new relative lows, so while it is, the “down there” argument still holds weight.
Prudence is growing well against Staples, but others are not. When you see that these ratios are overbought — especially if stocks are still falling — you’ll know whether the bottom is down or is already down. I just don’t see that adding credence to the idea that we’re going to see a retest of June lows, or somewhere near that.
What about yield?
Let’s finally turn our attention to TNX in more detail, given its critical importance to the stock. In case you are not familiar with this relationship, rates and stocks tend to move in opposite directions because TNX – which is a risk-free rate – has an inverse relationship to stocks. This is because the future value of a stock’s earnings must be discounted using risk-free rates. The higher the risk-free rate, the more discount is given on future earnings, making them less valuable today. When rates are too low, those earnings are currently worth more, so when rates rise sharply, equities are penalized on a valuation contraction. This is what we have seen in 2022. So what’s next for TNX?
First and foremost is the level of 3.48%, which peaked in June, before this stock market down. Rates started going down before the stock market’s lows at the end of that month, and we’re prepared for a similar scenario today. TNX tested the 3.48% level last week and so far, it has held up. If we get a breakout in the yield and they move massively higher, then all bets are off for the stock and we can get waterfall selling. I’m not betting that’s going to happen, but right now it’s a risk. We are at a very critical juncture with rates, so watch this carefully in the coming days and weeks.
On the plus side (if you are trading bullish), the PPO is showing an upward move as the tnx test price is higher. While the PPO is still in bullish territory, it has corrected to a level where rallies have failed at the last five separate times over the past year. Only once did the rally exceed the ~4 level on the PPO, so it is possible, but unlikely, based on this evidence, in my view.
The 14-day RSI on the yield is also showing weak momentum as it moved into the overbought zone, but it has bottomed out from previous levels. Again, this suggests that this rally in yield is losing steam.
Finally, the rate of change in the lower panel reflects a rolling 10-day change in price to yield, and we can see a third indicator suggesting that we are seeing momentum. The yield was higher during the last rally, but it has been very slow.
None of this is a guarantee that the produce will break and not go over. But it suggests that the chances of a breakout are much less than they are.
Combining all this, the next two weeks are going to be very important. While the June low test will be painful for equity holders, I think the pain will be short-lived and there will be a good buying opportunity. This year’s price action in equities has paid off a huge amount of pain from rates/recessions/whatever you’re worried about, and the evidence of price action we’ve seen, at this point I don’t believe we can Bears are also at the beginning or middle of a market.
I’d really like to see rates roll in this coming week and match some sort of bottom in the stock. We’ll see if that happens, but given the evidence we have today, I think it’s likely to happen. I think we will see a top in rates soon (over the next few weeks), we will see momentum and sentiment indicators in the stock form new bearish highs or lows (depending on the indicator), and this will correspond to a test June less in some form or fashion. If that happens, the shares would be in a good position to buy and I would be prepared to do so.
Of course, I may be wrong, and if I am, I will reevaluate with new evidence when appropriate. For now, I think we’re going to reduce equity by another 5% to 8% for that June, and we’ll see what happens after that. However, the bottom line for me is that I stick to my “bottom is in” call because I don’t see any evidence that the power remains in this bear market. place your bets.