A Selling Climax?

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Stocks moved higher until Thursday morning when Fed Chair Powell remarked “I would say 50 basis points will be on the table for the May meeting.” Most thought that this was already clear from his past comments, but the markets were not, as the stock market reversed to the downside. The S&P 500 went from being up 1% to closing down 1.5% as interest rates soared.

The 36.8% decline in Netflix
NFLX
(NFLX) stock that started after it reported earnings on Tuesday did not help boost investor sentiment. The real earnings test will come this week when 180 of the S&P 500 stocks report earnings including Apple
AAPL
Inc. (AAPL), Microsoft
MSFT
(MSFT), Amazon.com (AMZN), and Alphabet (GOOGL).

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The current data Indicates that of the “99 S&P 500 companies that have reported so far, 77.8% reported earnings above analyst’s expectations”. But the numbers at the end of this week may look entirely different and that could have accentuated the decline on Friday as the Dow was down over 1000 points minutes before the close but settled a bit higher.

The Nasdaq 100 was under the most pressure again last week as it closed down 3.9% followed by a 3.2% decline in the iShares Russell 2000. The S&P 500 dropped 2.8% for the week after being up 1.6% as of Wednesday’s close. This was the third weekly decline in a row. All three are down double digits year-to-date (YTD).

The Dow Jones Industrial and Dow Jones Utility Average were down 1.9% and 1.8% respectively. The Dow Jones Transportation Average was up 1.5% rising for the second week in a row. It was a tough week for the SPDR Gold Shares as they were down 2%.

The S&P 500 reversed on Thursday after reaching the flat 200 day MA (point b). The drop below the nine day trading range is clearly negative with the monthly S1 support at 4246.42. The key support levels to watch now are the March lows at 4161 and 4158 as well as the February 24th low of 4114.

Below the chart is a plot of $SPXADP which measures the % of the S&P 500 stocks that are advancing. A reading of 90% means that 90% of the S&P 500 stocks or 450 advanced. On Friday the reading was -94%, point c, which meant that only 6% of the S&P 500 or 30 stocks advanced on Friday. On November 30, 2021, point a, the reading was -97 which correlated with a price lower three days lower. Five days after the extreme reading the S&P 500 had gained 5%.

The reading for the S&P 500 was confirmed by a reading of -94 from the $NDXADP which means that only 6% of the Nasdaq 100 stocks were higher on Friday. There was a similar oversold reading from the $NDXADP on November 3th. I have found extremely low readings to be more valuable than extremely high readings.

So does this change the implications of last week’s market decline? Since the March 20th contribution “Bear Market Rally Or More?” it has been my view that the powerful rally from the March 14th low was part of the bottoming process. This I thought would lead to an intermediate term low and an eventual resumption of the longer term uptrend.

The rally topped on March 29th as the Spyder Trust (SPY)
PY
SPY
) pulled back to the $435 area. This when combined with the historically low bullish sentiment suggested that any further decline could test but was likely to hold the February low of $409.37. A decisive break of this level would target the $398-$400 level and then the support from early 2021 at $387.78.

The severity of the reversal from the doji high four weeks ago (see arrow) has weakened the technical outlook. This is supported by the analysis of the weekly advance/decline lines, After the heavy selling Friday now only the weekly S&P 500 A/D line is still slightly above its EMA. The NYSE Stocks Only A/D line reversed to negative two weeks ago but is still holding above the recent lows and the support at line c.

The weekly NYSE All A/D line continues to be the weakest as it never overcame its EMA or the downtrend, line d, on the rally. With last week’s data, the A/D line has now dropped below the early March low which makes it more likely that the February-March lows will eventually be broken.

The Invesco QQQ
QQQ
Trust (QQQ) remains the most vulnerable even though NFLX makes up less than 1% of QQQ. Two of its major components are Apple (AAPL) and MSFT) which make up over 21%. Both report earnings in the week ahead. The weekly reversal in the QQQ puts the focus now on $317.45, line a, with the weekly starc- band at $306.39. There is additional support at $297.90, line b, which is 8.4% below Friday’s close.

The weekly Nasdaq 100 advance/decline line is still above its recent lows, line c, but is declining sharply. If it is broken the next significant support is at the March 2021 low, line d. Several market measures are at or close to oversold extremes. The NYSE AD osc closed at -1020 (at the March low it was -1200) with the McClellan Oscillator at -154. Only 9% of the Nasdaq 100 stocks are above their 10 day MAs which is the third-lowest reading of the past year and QQQ close 5.4% below its 20 day MA

The sharply rising yields have also pressured the stock market as the volatility adds to the uncertainty. Additionally, for the first time since late 2018 the 3 Year T-Note rate at 2.88% provides an alternative to stocks.

The weekly chart of the 10 Year T-Note Yield shows that last week it traded again above the weekly starc+ band, That is the fifth week in a row (area c) and is sign that the current upward move is extremely extended. There was a similar situation in early 2021, area a, that was followed by sideways action for several weeks before a multi-month decline.

The weekly MACDs caught this decline quite well, point b, and also turned positive in early 2022. The indicators show no signs yet of topping out but I will be watching the daily analysis closely. Yields may not top out until the rate decision by the Fed on May 4th,

In addition to the key earnings this week there are also economic reports including Durable Goods, Consumer Confidence, GDP, Chicago PMI and Consumer Sentiment.

So what is the most likely scenario as we head into May? After Friday’s drop, one cannot rule out another wave of selling early in the week that could test or violate the lows from early in the year. This should be followed by a multi-day or longer rally that could move the SPY 3-5% higher and QQQ could gain 5-8%, especially if the big tech earnings are good.

I continue to think that the current extremes in sentiment without an actual recession are consistent with a correction not the start of a multi-month decline. However, the repeated rally failures mean that a turn will require a stronger and longer rally than we have seen so far this year. Otherwise, the oversold rally will be followed by another wave of selling that could take the averages below the February-March lows.

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Credit: www.forbes.com /

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