Day Hagan Tech Talk: Just One More Thing
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Summary
My wife calls me the “Question Man” because I am usually peppering her with questions about “things and stuff” which are probably insignificant to her. To me, not so much.
Where the Charts and the Narrative Diverge
My thanks to John Roque of 22V Research for the reference to Peter Falk and Columbo.
“Columbo was an NBC crime-drama series that starred Peter Falk and ran from the early to late 1970s and intermittently from the late 1980s to early 2000s. Played by Peter Falk, “Columbo” was a homicide detective who wore a rumpled beige raincoat, carried a cigar, drove a beat-up Peugeot, and affected an unassuming manner when he conducted his investigations. He asked a lot of questions. His catchphrase, often said after leaving the room only to then reenter it, was “Just one more thing.” In one scene, Columbo shakes his head and with a pained look on his face says, “I’m a strange guy… I worry. I mean little things… little insignificant details...”
In Columbo’s inquisitive fashion, I ask, “Where will, and what does it mean when the charts diverge from the prevailing Wall Street narrative?”
In certain instances, this question won’t be answerable until after the fact. That does not mean, however, that one can’t identify opportunity by observing, asking the question, and anticipating the answer.
Divergence 1: At the time of this writing, the S&P 500 (SPX) is flirting with a 12% year-to-date gain. As my friend and former colleague liked to say, “Not too shabby.” But is it really? According to Ned Davis Research, between 12-30-2022 and 10-06-2023, the Elite 8 (META, AMZN, NFLX, MSFT, AAPL, GOOGL, TSLA, NVDA) are up 59.58%, SPX is up 12.22%, and the S&P 492 Index (SPX ex Elite 8) is up 0.24%. The SPX Equal Weight Index is down almost 1%, and the S&P 600 Small Cap Index is down almost 3% during the same time.
I’d say 2023, like 2022, has been shabby, even downright difficult! Especially when combined with rising interest rates and a falling fixed-income market. To support your efforts during this environment, we welcome discussions about our Smart Sector Strategies, which include domestic equities (SPX benchmark), international ex-U.S., and fixed income.
Divergence 2: Credit Spreads have not dramatically widened, implying the stress levels within the credit markets are not under any duress yet. The economy is fine.
Really? Have you seen the recent selling in the Utility complex (XLU)? Consumer Staples (XLP)? Home construction/builder proxies? Please look at a chart of MCD, BA, or WMT. All reflect stress in the system. And while credit spreads may not be dramatically widening, they are moving in the wrong direction—Figure 1.
Figure 1: U.S. High Yield Index Option-Adjusted Spread. | “No stress in the system; the economy is fine.” This chart suggests otherwise.
As Don Hagan penned yesterday, “Our OAS (option adjusted spread) Factor in the Catastrophic Stop Model is nearing a sell signal. If OAS for IG Corporates or U.S. High Yield moves decisively above their respective mean values, the Catastrophic Stop model’s level will decline.”
Divergence 3: Inflation is moderate, under control, and no longer an issue because the Consumer Price Index (CPI) has fallen since summer 2022, which was just above 9%. Response in Figure 2 caption.
Figure 2: Natural Gas and 30-Year U.S. Treasury Yield. | While the decline in gasoline (thankfully) lends some credence to the narrative that inflation is behind us, rising interest rates (new cycle highs) and Natural Gas prices suggest otherwise.
Divergence 4: 1987 Crash Analogs are being passed around Wall Street daily. Again? Really? Stop it, please! To paraphrase one of my acquaintances, it seems like all these dire scenarios ended up with a 1929 or 1987 crash. She is right. October is actually “known as the month of market bottoms. Of the 60 market corrections (declines of 10%+ without a 10%+ rally in between) since 1945, 18 of them have bottomed during October.” (Source: Bespoke)
Figure 3: S&P 500 50-day MA and 200-day MA. | A confluence of support between 4200+/- and 4150 was tested in early October and held. Now we need to see how the SPX handles gap resistance in and around 4400 and the declining 50-day MA, currently at 4419, and maybe 4450+/-. I think there will be some more upside probing, but more work is needed to break the pattern of lower price peaks and start some lateral base building.
Figure 4: Crisis Events. | Considering the weekend events overseas, below is a list of crisis events and subsequent performances since 1907 from Ned Davis Research. “On average, during the crisis events, the DJIA has declined an average of -7.1%, but one month later has been up +4.2%.”
Note: Please let me know if you’d like to schedule a call to review the process and discipline underpinning our Smart Sector with Catastrophic Stop, Smart Sector Fixed Income, and/or Smart Sector International strategies. Considering the tape action of both equity and fixed-income markets in 2022 and 2023, I believe it may be a good investment of time.
Day Hagan Asset Management appreciates being part of your business 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 10.09.2023. Chart source: Stockcharts.com unless otherwise noted.
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