Posted by Adam Turnquist, CMT, VP Chief Technical Strategist
Friday, September 22, 2023
Key Takeaways:
- Stocks are struggling this month against a backdrop of higher interest rates and monetary policy uncertainty. Benchmark 10-year yields have surged around 40-basis points, surpassing resistance off the October 2022 highs. The recent breakout raises the question of how high yields will go—an important question that could continue to weigh on risk sentiment.
- The S&P 500 is down nearly 4% on the month, and technical damage is beginning to mount. The index has broken to the downside of a symmetrical triangle formation after taking out support at the 20- and 50-day moving averages (dma). Additional downside support below 4,330 comes into play in the 4,200 to 4,300 range, followed by the 200-dma at 4,189.
- The recent selling pressure has turned most momentum indicators bearish. Breadth is deteriorating as only 45% of S&P 500 stocks remain above their 200-dma. The two-year cumulative advance-decline (A/D) line for the S&P 500 has also pulled back to an inflection point after violating an uptrend.
- Despite the recent pullback in stocks, there have been no major signs of a sustainable flight to safety. The uptrend on the equal weight consumer discretionary vs. consumer staples ratio chart remains intact.
- Overall, the market is down but not out. Pullbacks are entirely ordinary within the context of a bull market, and while the jump in rates is concerning, the S&P 500 remains in an uptrend and above its rising 200-dma.
While September is living up to its reputation as being a weak month for stocks, seasonality cannot take all the blame for the selling pressure. In addition to a rally in crude oil, a nine-week winning streak in the dollar, and a ‘hawkish pause’ from the Federal Reserve this week, stocks have had to contend with nearly a 40-basis point surge in 10-year yields this month, which are now trading near 4.50%. Once again, the move in rates has proven to be too much too fast for equity markets to handle. And as LPL Research highlighted in August (Yields on the Rise—Too Much Too Fast?), a breakout on the 10-year Treasury yield above the October 2022 highs at 4.34% would be a “warning sign for a potentially deeper pullback in stocks.”
Technical Damage
The S&P 500 is down nearly 4% on the month, and technical damage is beginning to mount. The index has broken to the downside of a symmetrical triangle formation after taking out support at the 20- and 50-dmas. Yesterday’s session-low close at 4,330 landed right at support from the June 2023 lows and August 2022 highs. Additional downside support comes into play at the 4,200 to 4,300 range—a likely spot for a rebound—followed by the 200-dma at 4,189 (also near a key Fibonacci retracement level).
The recent selling pressure has turned most momentum indicators bearish. The Moving Average Convergence/Divergence (MACD) indicator—a trend-following momentum indicator that shows the relationship between two exponential moving averages—recently rolled over into a sell position. Given that the S&P 500’s uptrend is still intact, and price remains above its rising 200-dma, we view the sell signal as a shorter-term signal pointing more toward a pullback than a market top.
Market Breadth
Breadth is deteriorating based on the declining percentage of stocks trading above their 200-dma. As of September 21, only 45% of S&P 500 stocks remained above their 200-dma, falling from 76% near the end of July. On a slightly more positive note, the more offensive or cyclical sectors are holding up better than their defensive counterparts. Financials have also bucked the trend of bad breadth this month as 49% of sector stocks are now trading above their 200-dma, as opposed to only 33% one month ago.
Advance-Decline Line at an Inflection Point
The two-year cumulative advance-decline (A/D) line for the S&P 500 has pulled back to an inflection point after violating an uptrend. Technically, a break below support off the August lows would check the box for a lower low and suggest a new downtrend is underway. For reference, the A/D line is calculated by taking the difference between the number of advancing and declining stocks on the index for a given trading day and adding that difference to the prior day’s value. A rising A/D line is indicative of positive market breadth as the number of advancing stocks is outpacing the number of declining stocks, and vice versa for a declining A/D line.
No Major Flight to Safety…Yet
Despite the recent pullback in stocks, there have been no major signs of a sustainable flight to safety. As shown below, the S&P 500 Equal Weight Consumer Discretionary (SPXEWCD) vs. S&P 500 Equal Weight Consumer Staples (SPXEWCS) ratio chart continues to generate higher highs and higher lows, indicating the equal weight consumer discretionary sector is outperforming the equal weight staples sector. Why is this important? Given the economic implications between discretionary spending on things consumers want vs. spending on things consumers need, relative performance between the two sectors is often used to identify offensive (consumer discretionary outperforming) or defensive (consumer staples outperforming) leadership trends. For now, offense remains on the field.
SUMMARY
The S&P 500 is down nearly 4% on the month, and technical damage is beginning to mount. While weak September seasonality is capturing the blame, selling pressure has primarily been driven by a jump in interest rates. Benchmark 10-year Treasury yields have climbed roughly 40 basis points, surpassing resistance off the October 2022 highs. The recent breakout raises the question of how high yields will go—an important question that could continue to weigh on risk sentiment.
Technically, the S&P 500 has broken to the downside of a symmetrical triangle formation. Additional downside support below 4,330 comes into play in the 4,200 to 4,300 range, followed by the 200-dma at 4,189. Momentum has turned bearish, and breadth is also deteriorating. However, despite the recent pullback, there have been no major signs of a sustainable flight to safety. Overall, we believe the market is down but not out. Pullbacks are completely normal within the context of a bull market, and while the jump in rates is concerning, the S&P 500 remains in an uptrend and above its rising 200-dma.
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