Day Hagan Tech Talk: Q3 & September are Behind Us - Phew
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Summary
“October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."
Thankful
While the quote in the summary is by Mark Twain, the emphasis (underlining August and September) and title are mine. I think many Wall Street participants, including myself, are thankful to have the third quarter (Q3) behind them. Why? Because outside of “FANG” type stocks, (aka Magnificent 7, Elite 8, or Big 9), and excluding the period between late May to mid-July, the domestic equity market has deceptively narrowed this year. While the S&P 500 is up for the year, it declined over 6% from its July peak through 9/29/23 and fell approximately 5% during September alone--making 2023 a difficult year for a wide swath of equity market proxies.
Figure 1: Performance of Various Domestic Equity Market Proxies (through 9/29/23). |Unless something drastic occurs (lower interest rates, lower crude oil, a reversal down by the U.S. Dollar), I don’t think the disparity in performance will change or get any easier.
Short-Term
Late last week, both the 10-Year U.S. Treasury Yield and Crude Oil reached the initial price objectives and resistance levels that I’ve been highlighting since early September. Coupled with an oversold condition, increasing bearish sentiment, and the inability of the U.S. Dollar Index to decisively break above resistance, there was some initial stability in the S&P 500 (SPX/4288.39) around the vicinity of 4200. The intraday low was 4238. Figure 2.
Currently, after the strong upward move yesterday (10.2.23) by both the 10-year U.S. Treasury yield and U.S. Dollar Index, equity bulls need a further period (days to weeks) of stability— backing and filling, to develop a base of support. During this time, if it occurs, we will be looking to see if a broader base of participation develops. However, to reiterate, unless interest rates turn sharply lower (they may pull back, but I believe the trend remains up), Crude Oil ($88.82) continues to fall (support exists in the mid-low $80’s, as the uptrend remains in force), and the bullish configured U.S. Dollar Index (107) gets turned back as it approaches the underside of an initial range of resistance starting at approximately 108, the internal price based backdrop will remain difficult and I wouldn’t be surprised if the current performance derby (narrow participation) continues. Also, during periods of weakness, we will look to see if positive divergences occur between “price” and certain internal measuring tools/sentiment.
Figure 2: S&P 500 with falling 50-day MA (red) and rising 200-day MA (blue). |It is essential that the SPX stays above support in and around 4250. Otherwise, I’d expect a full test of 4200 to 4150, where a confluence of support exists.
Going forward, we don't want to see sentiment quickly shift back towards the bullish side of the ledger. Also, following a period of stability/upside probing, if we are going to see further downside testing, then this rally likely stalls below 4335 +/-, maybe 4400 (gap resistance, neckline – see Figure 2). Finally, my colleague Regan Teague recently wrote “Credit spreads, in our opinion, are a good indicator of stress levels within the credit markets. We typically see spreads increase dramatically during times of extreme duress.”
Figure 3: U.S. High Yield Index Option-Adjusted Spread. |Currently, while they are not dramatically rising, they are moving in a direction that makes me uncomfortable. Since credit spreads are one component of the NDR Catastrophic Stop Loss Model, a decisive close above the lower horizontal red resistance line would, in my opinion, not be good.
Figure 4 Late Addition: Gasoline and Natural Gas. | Thankfully, some relief for the consumer as each is still rangebound — we’ll take it.
Note: 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 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, 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 10.01-02.2023. Chart source: Stockcharts.com unless otherwise noted.
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