Craig Thompson | May 01, 2023 02:11PM ET
The Fed is raising rates in hopes of taming inflation by reducing demand. When the Fed eventually reverses course and begins to lower rates, it will be accompanied by a weak economy (probably a recession). Historically, the stock market doesn’t bottom until the Fed is near the end of its easing cycle and the recession is in its later innings. This suggests that the ultimate bottom in the stock market is many months away.
One historically accurate signal in predicting recessions is a yield curve inversion (see chart below). An inversion means short-term rates are higher than longer-term rates. This does not happen often but when it does the odds of a recession are high.
Below is a chart of the difference between the 30-year yield less the 3-month yield in the top panel. When the line drops below zero (horizontal blue line) yields are inverted. Look at the far right of the chart. The yield is substantially inverted (red circle).
In the lower panel is the S&P 500 and I have highlighted the last three major inversions. In each case, a recession has followed and the stock market has fallen between 33% – 56%.
Conclusion:
As long as the S&P 500 (chart below) is above its 200-day moving average the market is bullish from a price perspective. Here are my takeaways from the chart.
It would be bullish for the broader stock market if the index can advance decisively above resistance.
Conclusion:
Last month, I charted the major S&P 500 sectors and stated that most of them looked weak with the lone exception being technology. The technology sector fund (NYSE:XLK)) (charted below) is the most important sector in that it has the highest weighting in the index and is considered a risk-on group. Therefore, the sector showing strength is a bullish market signal.
Notice how the S&P 500 is sitting near its February high (red verticle line). Now look at the technology sector and you see that it has advanced well above its February high. At face value, this is a bullish signal but when you dig a little deeper we see that the sector is not as strong as it appears.
The sector is capitalization-weighted meaning the larger stocks within that sector have a larger weighting in calculating its performance. While the index is substantially above its February high there are only 18 stocks within that index of 67 stocks above their respective February highs.
Conclusion:
The Nasdaq 100 (chart below) has been leading the S&P 500 higher. Here are my takeaways from the chart.
Conclusion:
Below is a chart of the Nasdaq 100 ETF, Invesco QQQ Trust (NASDAQ:QQQ), in the upper panel and the Nasdaq 100 Equal-Weighted ETF (NASDAQ:QQEW), in the lower panel. Here are my takeaways.
The recent advance in the Nasdaq 100 is being made on weak breadth. The majority of stocks within that index are not above their respective February highs as seen by the equally weighted index diverging negatively with the Nasdaq 100 which is capitalization weighted.
Conclusion:
One of the reasons that I turned bullish at the beginning of this year was that the market transitioned to a decidedly risk-on environment and longer-term breadth indicators turned positive. This turned out to be a whipsaw or false signal given that strength reversed course later that quarter.
In the chart below are the S&P 500 Index in the upper panel, the Net New 52-Week Highs, and three relative strength charts. I have placed a verticle green line at the point in early January where the chart turned bullish.
Here are my takeaways:
Conclusion:
As long as the S&P 500 continues to trade above its 200-day moving average market conditions are favorable from a price perspective. However, given that the majority of market internals have turned decidedly negative I don’t place a lot of confidence in the market’s ability to continue to trade above this average for an extended period of time unless internals somehow improve.
***
Disclaimer: Both our conservative and aggressive models are invested defensively. Our net equity exposure is minor and we own both long and short positions.
I will continue to adjust our net equity exposure based on the weight of the technical evidence.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.