The Stock Market May Have Already Topped Out
Michael Kramer | Mar 04, 2021 12:15AM ET
Stocks were smashed on Wednesday, Mar. 3, with the NASDAQ 100 (QQQ) down 1.6% for the week, giving back all of Monday’s big gains. Worse is that the ETF closed below support at $310, which probably means we have more to fall. The next level doesn’t come until $305; after that, $298. The ETF could easily fall back to $274; it sounds crazy, but there is a giant gap there, and it needs to be filled.
The NASDAQ 100 also finished yesterday below the March uptrend. This could be a significant change in trend. The RSI hasn’t come close to bottoming; it needs to get below 30.
The S&P 500 (SPY) wasn’t any better, falling on Wednesday by 1.3% and closing at 3,819, giving back almost all of Monday’s gain. We did manage to also close on the lows of the day and continue to put in lower tops in the index. It is also notable because we closed for a second time below the November uptrend. That means the next uptrend is from the March lows. The only good news is that the RSI hasn’t made a new low; it is still hanging on.
The 10-year was very close to taking another significant move higher, with the potential to push up 1.65%, should it break above 1.5%.
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The 10-year minus 2-year spread was approaching 1.4%. That was a big level of resistance. An increase above 1.4% sets up a big climb to around 1.8%.
Why do we care about the 10-year/2-year spread? It has been a pretty good indicator of S&P 500 tops in past years—yes peaks—like the 2000 and 2008 kind. There was also a pretty quick decline of around 20% in the early 1990s. If this were a peak in the market before a long and protracted decline, it would make sense from a historical perspective.
The chart shows rather clearly that the market tends to peak around the time the spread bottoms. The decline in the S&P 500 has happened as the spread has started to widen. It means that when 10-year rates start to rise, it kills the bull market, but again, these are big moves in the 10-year, like 200 to 300 bps. The kind of move we are now in the middle of witnessing.
Based on this chart, the S&P 500 should have already peaked, and it very well may have. If that is the case, then we could be looking at a massive drawn-out drop. Not fast and sharp like March 2020, but something more like 2000 or 2008.
Amazon (NASDAQ:AMZN) fell on Wednesday below some key support at 3,000, and that will put 2,870 back on the table. The RSI has broken lower too, and it is not yet oversold, at 34.
Roku (NASDAQ:ROKU) broke support on Wednesday at $385, not a shocker. The stock isn’t done falling either. It likely heads towards $310, and then probably lower than that.
Costco (NASDAQ:COST) was so close to filling that gap at 317.50. The stock is getting oversold, but that doesn’t mean it’s a bottom.
Shopify (NYSE:SHOP) fell through support at $1280 yesterday, with the next big level to watch for coming at $1105.
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