Day Hagan Tech Talk: Path of Least Resistance Shifting, Short-Term
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Summary
With a still-fully invested position, as dictated by the NDR Catastrophic Stop Loss model, and continuing uptrend by the S&P 500, it appears that the path of least resistance has shifted lower on a short-term basis, especially relative to large cap growth/technology. This is somewhat typical as price-related indicators often oscillate back and forth until a sustainable trend is identified.
How Now?
“How now” is a way of asking, “what's happening or how are things?” As discussed before and during our recent Chart Jamboree webinar, sentiment on both a short- and intermediate-term basis has been excessively optimistic—too complacent. Simultaneously, Large Cap Growth indices were overbought; NYSE FANG+ Index & SPX traded 3 standard deviations above their 50-day MA and exhibited a parabolic price pattern. The short-term equation includes, per J.P. Morgan, “positioning [Figure 1], a hawkish Fed, global central bank developments (interest rate hikes), renewed growth worries, and quarter-end rebalancing.” We discussed tactics and discerning downside momentum prior to and again last week, titled “Follow the Fang.” Please reach out for details.
Figure 1: Positioning (as defined in chart). | While stretched can get more stretched, it gets harder to keep the rubber band from snapping back as allocations to equities by systematic and discretionary strategies reflect an almost exuberant mindset.
Figure 2: S&P Sector Performance between June 15 and June 23. | Since the S&P 500’s very near-term closing high on June 15, we have seen a broader range of underperformance when compared to the S&P 500’s decline during the same time. Unless this is remedied (upside participation broadens again), it will be harder to extend the SPX’s current trend deeper into 2H23.
Additionally, broader equity market measuring tools (S&P 500 Equal Weight, Value Line geometric, NASDAQ 100 Equal Weight, and Vanguard Extended Market ETF [VXF—all stocks in U.S. market without the S&P 500 components, cap-weighted, but no position greater than 1%]) have fallen between 2.40% (SPXEW) and 3.52% (VXF) during the same time, and in which the SPX declined 1.75%.
Bottom Line: The improving (broader) upside participation that began in and around June 1 has stalled for now, notwithstanding yesterday. To reiterate what was mentioned above, unless this is remedied, it will be harder to extend the SPX’s current trend deeper into 2H23.
Figure 3: S&P 500 and NASDAQ. | Areas of SPX support (price labels and green lines) = in and around 4325 (August ‘22 intraday and closing peak), 4230+/- (gap support—green circle), and 4200 (February ’23 intraday and closing peak, uptrend line). As I’ve noted before, I won’t be surprised to see the gap filled. Resistance = price label and red line. Besides the green support line and red resistance line shown, please reach out for specific levels relative to NASDAQ.
Adding to Wall Street’s angst: “Estimates via GS: $33bn of US equities to SELL for the upcoming month/quarter end… the largest rebalance the desk has seen since June 2022, 2x the average size and ranks in the 83rd% over the past 3 years,” per Tier 1 Alpha.
Tailwind Becoming Headwind
Figure 4: S&P 500 Cycle Composite for 2023. | This cycle composite is supportive through early July but then turns into a headwind. Note: Cycle composites are second-tier inputs; i.e., they provide background information but are not part of Day Hagan’s risk management models.
Please let me know if you’d 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.
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 06.26.2023. Chart source: Stockcharts.com unless otherwise noted.
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