Day Hagan Tech Talk: Into the Weekend and Beyond
A downloadable PDF copy of the Article: Day Hagan Tech Talk: Into the Weekend and Beyond (pdf)
Summary
Despite the equity market rally, which went up faster than expected, the S&P 500’s uptrend is intact but overbought (condition, not a signal). For 2024 the Catastrophic Stop model has been positive, and we are aligned accordingly. If our models shift bearish, we will raise cash.
What Equities Have Experienced
Considering all the volatility we have seen in 2024 relative to equities, interest rates, politics (domestic and international), energy/commodity prices, wars/infighting (Middle East, Ukraine, Indo-Pacific, and domestic), let’s look at where equities have landed thus far. Year-to-date, Large Cap Growth stocks (Index Movers) are still leading the way, but others (Non-Index Movers) have slowly joined the party. This participation is evidenced by the S&P 500 Equal Weighted Index recently closing at a new all-time high, yet the Large Cap weighted S&P 500 didn’t.
Figure 1: Year-to-Date Performance. | Through 8/22/24 and not adjusted for dividends.
What We Are Watching
As Marty Zweig noted, “It’s OK to be wrong; it’s unforgivable to stay wrong.” Our goal is to stay on the right side of the prevailing trend, introducing risk management when conditions deteriorate. In terms of how Wall Street participants are measuring risk-on versus risk-off and investing accordingly, while we emphasize the Catastrophic Stop Loss model, what other, arising guideposts can we follow that show if the way Wall Street’s attitude towards risk is measured is, on the margin, changing? Here are some guideposts we are following:
Interest Rate cuts, speed: With a September interest-rate cut looking like a forgone conclusion, attention should shift to the speed of future interest rate cuts. Figure 2.
S&P 500: Reaction to Fed Chairman Powell’s speech, likely signaling sufficient progress on inflation, and resistance at 5639 (gap from 7.17.24) and 5667.20 (close)/5670 (intraday), recorded on 7.16.24. Gap support between 5501 and 5463 (green circle). Figure 3.
U.S. Dollar Index: Driven by expectations that the Fed will cut interest rates more aggressively than other central banks around the world, the index has traded down to the lower end of a multi-year trading range (support). Considering that DSI sentiment is getting down to very low levels, it will be important to see how the index reacts to support. Please reach out for a chart.
Gas and Crude Oil (Figure 4): Regardless of why they are declining, relief at the pump may support softening consumer spending.
Despite a lot of geopolitical news, and with support for Crude Oil close at hand, why is Crude Oil continuing to decline and what is it telling us?
Gold: As has been my opinion for the better part of the past 24 months, strong gold prices generally mean there’s anxiety about something, and gold can be owned as a hedge against such. Also, according to J.P. Morgan, “strength may be emanating from China because the country has been steadily raising its gold reserves...” Please reach out for a chart.
High Beta vs. Low Volatility and Momentum vs. Dividend proxies: After breaking down and now having rallied up close to the breakdown point (resistance), what happens next will be important in determining if the way Wall Street’s attitude towards risk is measured is changing. Figure 5.
The current price charts of Defensive/Interest Rate-sensitive proxies are more constructive than the price charts of the Technology/Cyclical proxies. Please reach out for 1-year price charts of S&P macro sector proxies.
Bitcoin: While subject to a short squeeze at a moment’s notice, if resistance at approximately 62,720 and/or 67,500 is violated, the overall chart configuration continues to record a string of lower peaks—weakening/bearish. Initial support exists between 57,600 and 56,100 followed by 54,000+/-, and then nothing until approximately 47,000. Please reach out for a chart.
IPO Index: Worthy of following because it reflects the amount of equity supply in the marketplace, or potential equity supply coming to market (sentiment). Please reach out for a chart.
Bottom Line: While the bullet points discussed above aren’t necessarily bad/bearish in and of themselves, they do suggest that, in addition to the Catastrophic Stop Loss Model (and credit spreads), a laser-focus on an additional set of guideposts is important.
Figure 2: S&P 500 Index Around First Fed Rate Cuts vs. Speed of Cut. | Eventually, fast easing cycles have been less friendly for stocks.
Note: One analyst at Ned Davis Research believes “Weaker-than-expected inflation data and intermediate-term inflation trends support a slow pace of rate cuts.”
Here and Now
Considering that a few Advance-Decline Lines were just at new all-time highs (NYSE all issues and common stock only, S&P 500 and Mid-Cap), indicating many stocks rallying together (bullish) but also a near-term overbought condition, please use support and resistance shown in Figure 3 accordingly.
Figure 3: S&P 500 – year to date chart. | Resistance highlighted in red; support in green and blue.
Figure 4: Gasoline and Crude Oil – Continuous Contract. | Much closer to support (green lines) than resistance (red lines). The time to stabilize/bounce is now.
Figure 5: High Beta vs. Low Volatility and Momentum vs. Dividend proxies. | Falling lines depict outperformance by risk-off proxies, Low Volatility and Dividend, and vice versa.
Considering that the relative strength trend of a Semiconductor proxy (SMH) vs. SPX has, after breaking down, run up to and turned back from resistance, the 8.28.24 earnings report from NVDA and the Employment report on 9.6.24 could lead to some significant volatility in either direction for the equity and interest rate markets. Please reach out for the relative strength chart.
Please Note: Going forward, the weekly Tech Talk reports will be released on either Thursday or Friday. They will no longer be released on Tuesday.
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 8.21-22.2024. Chart source: Stockcharts.com unless otherwise noted.
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