The S&P 500 is down just 5.5% from its late July high, and many investors are already looking for signs that the stock market pain may be coming to an end.
With that in mind, Seaport Research Partners Victor Cossel shared a few technical charts that could offer some clues as to the timing of a possible turnaround. But the upshot – at least for now – is that more pain is likely to lie ahead unless the relentless rise in Treasury yields and the US dollar comes to an end.
First, the percentage of Nasdaq 100 components trading below their 200-day average should be reduced to the number of S&P 500 and Russell 2000 members trading below their 200 DMAs.
Moving averages are used by analysts to measure the directional momentum of a particular security. By looking at these trends among index components, analysts can get a sense of exactly how dependent an index’s performance has been on a small core group of stocks, a phenomenon that has been prominent in U.S. stock markets all year thanks to the rise of the ‘Magnificent Seven’. .”
The ‘Magnificent Seven’ is a group of mega-cap tech stocks that have gotten the biggest boost from the artificial intelligence craze. It includes Nvidia Corp. NVDA,
Microsoft Corp MSFT,
Apple Inc. AAPL,
Meta Platforms Inc. META,
Tesla Inc. TSLA,
Amazon.com Inc. AMZN,
and Class A GOOGL from Alphabet Inc.,
and Class C GOOG,
According to Cossell’s latest figures, which were accurate as of the end of Monday’s trading day, 61% of Nasdaq 100 NDX members were still above their 200-day moving averages, compared to 45% for the S&P 500 SPX and 35 % for the Russell 2000 IWM,
although these numbers may have changed slightly after Tuesday’s heavy sell-off in US stocks.
Should selling pressure increase, traders will look to see if the S&P 500 can hold the line at 4,200, which has served as a long-term support level for the large-cap index.
A break below 4,200 could spell more trouble for stocks ahead, as traders would likely view such a break as a signal that momentum is accelerating to the downside.
However, some of the market turmoil that likely inspired, at least in part, the Federal Reserve’s most recent higher-for-longer recommendations is starting to dissipate.
For example, the S&P 500 information technology sector officially entered correction territory on Tuesday when it closed at 2,869.6 after falling 1.8% on the day. The decline left the index down 10.5% from its 52-week high of 3,207.29. A stock or index is said to be in correction territory once it has fallen 10% or more from recent highs.
The central bank’s interest rate plans, unveiled after the close of its September policy meeting, are widely blamed for recent moves in government bond yields and the dollar.
To be fair, rising real rates – i.e. inflation-adjusted bond yields – could continue to pose problems for stocks. As Cossel showed in a chart from earlier this week, the S&P 500’s valuation on a forward price-to-earnings basis remains remarkably high based on where the 10-year real rate is trading.
The 10-year real rate that Cossel uses here measures the 10-year nominal yield on government bonds BX:TMUBMUSD10Y, adjusted for the 10-year breakeven spread.
“Unless rates fall, the S&P 500 appears vulnerable at current levels,” Cossel said in the note.
U.S. stocks closed sharply lower on Tuesday, with the Dow Jones Industrial Average DJIA posting its worst daily decline since March, while Treasury yields rose and a popular measure of the value of the U.S. dollar hit a 10-month high. The ICE US Dollar index DXY,
the aforementioned gauge rose by 0.2% to 106.18.
The Dow Jones fell 338 points, or 1.1%, to 33,618.88, the S&P 500 SPX lost 63.91 points, or 1.5%, to 4,273.53, and the Nasdaq Composite COMP fell 207.71 points, or 1.6%, to 13,063.61.
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