Day Hagan Tech Talk: Debby
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Summary
Wall Street experienced its own version of Hurricane Debby due to sector and stock rotation, position unwind, seasonal headwind, economic and EPS growth concerns, geopolitical concerns, machine trading, liquidity concerns, and widening credit spreads (Figure 1).
Lest We Forget
To paraphrase Don Hagan in his Catastrophic Stop Loss Update Monday:
The current equity market situation is fluid... As our indicators shift, we will adjust the portfolio accordingly, up or down. Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate.... The Catastrophic Stop model is positive, and we are aligned accordingly. If our models shift bearish, we will raise cash.
Figure 1: Stock Market Corrections. | Sometimes investors forget that volatility in both directions is part of the process and shouldn’t come as a surprise.
An Oversold (OS) Low vs. a Bottom
Several indicators suggest an OS low has been recorded—bullet points below and others shown in Don Hagan’s Monday update. Please let me know if you haven’t seen his update. In my experience, however, a Low is only the first part of the bottoming process because it is a function of price only. A Low takes on the shape of a V (whoosh down and sharp rebound up). A Bottom is a function of both price and time and has not yet developed! A Bottom resembles a W and entails a lot of intraday and day-to-day volatility, testing and retesting. A Bottom takes more time, work, and patience. Additionally, some type of momentum reversal, from down to up (encapsulated in our S&P 500 short-term buy model used in the Catastrophic Stop strategy), increases the odds that a market Low/Bottom has been established.
We consistently review measures of an OS condition/panic selling, like what just occurred, to determine if selling has reached extreme short-term levels, and they include:
Oversold levels are being reached/approached. Besides what Don Hagan addressed Monday, this is defined by 2 standard deviations below a 50-day MA—Figure 2.
NYSE Declining Volume and Declining Issues spikes and QQQ, SPY, DIA volume spikes. Volume spikes often occur in and around short-term lows.
Volatility spikes: VIX, NDX, RUT, AAPL, and Crude.
Percentage of stocks above 20-day MA/EMA.
NASDAQ: New 52-week lows comparable to October 2023 level.
Small cap proxies successfully tested support at a rising 200-day MA—Figure 5.
Additionally, since early July, the broader market (S&P 500 Equal Weight and NASDAQ 100 Equal Weight) is outperforming (down a smaller percentage/up a greater percentage) the technology/growth/large cap-heavy equity market proxies (S&P 500, NASDAQ 100).
Figure 2: S&P 500 with Bollinger Bands (2 standard deviations above and below 50-day MA). | One visual showing an OS condition.
Note: Considering the OS condition, I think that the throwback rally yesterday, 8/6/2024, was of poor quality. The quality of any rallies needs to improve, now. It needs to get up and go, now. Otherwise....
Prices Trend—Up, Down, and Sideways
Finally, given the chart damage (Figures 3-5) the answer to the following questions is important:
What is the quality of any rally? Breadth figures confirm, or not? New Lows contract, or expand?
Do the Index Movers and Non-Index Movers trade in sync, or diverge?
Will sentiment get more bearish on rally tries (bullish)?
Are early gains held or sold into the close?
Does the Catastrophic Stop Loss model change?
Figure 3: S&P 500. | Please use Monday’s intraday low (5119) as an initial support level. More importantly, how does SPX handle resistance, depicted by the levels highlighted in red.
Figure 4: Dow Jones Industrial Average. | Support held where it needed to—green uptrend line. The big test will come as resistance (selling pressure) is encountered—highlighted in red.
Figure 5: Small Cap proxies. | Support, defined by a rising 200-day MA, held where it needed to. Please respect the support (green arrows) and resistance (red circles/lines) levels highlighted.
Figure 6: CBOE 10-Year U.S. Treasury Yield Index (TNX). | After having obsessed over the pattern of lower peaks and lower troughs, implying lower interest rates, for the past 4+ weeks, now is the time to focus on support. I think the move lower by interest rates is about done for now.
Please let me know if you would like to schedule a call to go over the process and discipline underpinning our Smart Sector with Catastrophic Stop, Smart Sector International, and/or Smart Sector Fixed Income strategies. Disclosures and Fact Sheet information can be found here: https://dhfunds.com/literature.
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know how we can further support you.
Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 8.5-6.2024. Chart source: Stockcharts.com unless otherwise noted.
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