A Rare Selloff On Wall Street

BOUNCE ATTEMPT POSSIBLE IN COMING DAYS

According to breadth data from stockcharts.com, Monday’s session featured the lowest intraday NYSE Advance-Decline Volume reading in history. Given total market volume has changed significantly over the past 80 years, it is more relevant to compare Monday’s selloff to the recent past (chart below).

The last intraday reading in the ballpark of Monday’s came on December 24, 2018. We all know Christmas Eve 2018 marked an important low. Is it possible for a market that reached such an oversold state to keep dropping? Yes, however, from an odds perspective, it would not be shocking to see at least a significant bounce in the coming days. The table below shows what happened in the stock market after extremely low NYSE Advance-Decline Volume intraday readings in 2010, 2011, 2016, and 2018. In all four of the recent cases, the S&P 500 was higher seven calendar days later by an average of 5.01%.

The Senior Loan ETF, which was helpful in January 2019, was able to rally into Monday’s close and finish flat for the day. The 10-2 yield curve also improved Monday (moved further away from inversion).

As pointed out on the @OddStats Twitter Feed, it is extremely rare for a Monday to be down more than 2% when the previous week ended with three red sessions of 0.70% or more. It has occurred eight other times since 1950. The table below shows stock market performance was positive after 14 calendar days in all of the historical cases since 1950.

Our allocations, which include the cash raised last week, bonds, and gold, remained in line with the data at Monday’s close. Additional adjustments may be called for, especially if the S&P 500 fails to make a stand somewhere between Monday’s close and 2750-ish. The blue and green lines below come in between 2770 and 2800-ish. The S&P 500’s weekly chart has a lower Bollinger Band at 2776; the monthly Bollinger Band centerline currently sits at 2782. All of these guideposts are within 3.3% of Monday’s S&P 500 close.

Monday’s close came near the 61.8% retracement of the rally that began in early June.

Monday’s close also came near an area that featured four gaps (blue arrows below). While these gaps have been filled, it still tells us the market has deemed this general area to be important in the past.

Another possible guidepost comes on the weekly chart of stocks (SPY) versus bonds (TLT). The ratio has made a stand near Monday’s close on several occasions. At the end of the week, we will learn something either way (bullish or bearish).

UNTIL THE MARKET CAN MAKE A STAND, CONCERNS REMAIN

This week’s video outlines numerous short-term developments that prompted some profit-taking and defensive positioning last week. Monday’s session did not alleviate these concerns.

LOW, BOUNCE, OR BEARISH BREADTH THRUST

Given our current allocations, model readings, rare oversold nature at the end of Monday’s session, and the fact that potential support is within 3.3% of the close, it was prudent to see if the market can try to make a stand or bounce in the coming days. The concerns outlined in this week’s video remain, and we have to expect that rare and lopsided breadth sessions are most often found near lows, but they can also surface in the early stages of declines that still have room to run. Therefore, it is extremely important that we keep all options on the table, including selling into strength on what could be a short-lived bounce attempt. As shown in the chart below, the S&P remains above an upward-sloping 200-day moving average. The market recently made a higher high and has yet to print a lower low. For now, we must balance the very concerning short-term data/facts with the still constructive longer-term facts.

The chart below also aligns with the possibility of the market trying to make a stand in the coming days. The percentage of NYSE stocks above their 200-day exponential moving average is sitting near an area where the S&P 500 made a bullish stand twice in 2016 (see first two blue arrows and green lines). The blue dotted line shows the reading at the S&P 500’s June 2019 low. Like all the charts above, we will learn something either way.

This post is written for clients of Ciovacco Capital Management and describes our approach in generic terms. It is provided to assist clients with basic concepts, rather than specific strategies or levels. The same terms of use disclaimers used in our weekly videos apply to all Short Takes posts and tweets on the CCM Twitter Feed, including the text and images above.

It’s Make Or Break Time For Stock Market Bulls

Powell, Trump, Concerns, And Key Levels

The Message From The Stock/Bond Ratio

BONDS WERE EXTENDED AT THE END OF MAY

Rare extended look on May 31, 2019.

A June 4 post outlined an extremely rare and extended condition in the bond market that had only occurred ten times in the past thirty-three years. The historical cases told us to be open to a period marked by bond underperformance relative to the stock market. Thus, it might be helpful to revisit the stock vs. bond topic as we near the end of July.

STOCK vs. BOND MOMENTUM

The weekly chart below shows the performance of the S&P 500 (VFINX) relative to the total bond market (VBMFX) between 2016 and 2019. In Q1 2016, as the S&P 500 was forming an important low, weekly MACD printed a bullish cross that occurred below the MACD centerline, telling us the bulls still had some work to do from a primary trend perspective. In Q3 2016, another bullish MACD cross occurred, but this time it took place above the MACD centerline, which aligns more odds-wise with the end of a countertrend move within the context of an established bullish trend. After the second MACD cross, stocks significantly outperformed bonds. A similar look was nailed down three weeks ago when the second MACD cross occurred above the MACD centerline. The longer the MACD cross remains in place, the more relevant it becomes. Conversely, a sharp reversal in the stock/bond ratio, followed by a bearish MACD cross would add to the concerning side of the bull/bear ledger.

RARE WEEKLY STOCK MARKET SETUP

The S&P 500 recently spent 18 weeks below the 23-week moving average and then printed 15 consecutive weekly closes above the 23-week, which indicates a significant and sustained shift in the market’s perception of future economic outcomes.

HOW MANY TIMES HAS SOMETHING SIMILAR OCCURRED AND WHAT HAPPENED NEXT?

To answer the questions above, we looked for cases dating back to 1950 that featured at least a 15-week drop below the S&P 500’s 23-week moving average followed by at least 8 consecutive weekly closes above the 23-week. Like numerous “this just happened in 2019; what happened next historically?” studies covered in recent months, average S&P 500 performance was satisfying after the initial weekly close back above the 23-week (see table below).

COMPARING 2019 TO 2000/2007/2015/2018

This week’s stock market video make numerous fact-based comparisons between 2019 and painful periods in the stock market, allowing you to draw your own conclusions.

EMPLOYMENT AND CONSUMER SPENDING REMAIN STRONG

The probability of really painful long-term outcomes in the stock market tends to increase when the U.S. economy slips into a recession. Thus, it can be helpful to monitor two key components of the recession equation: consumer spending and employment. From Tim Duy’s Fed Watch Blog:

“While the 4.3% pace of consumption spending is not likely sustainable, the underlying strength likely is sustainable. I have said this before, but I think it is worth repeating: Do not bet against the American consumer in the absence of widespread job losses. With that in mind, note that initial unemployment claims continue to move sideways at very low levels. We have yet to see the upturn in claims consistent with even sharply slowing job growth let alone steep declines in the number of jobs.”