Day Hagan Tech Talk: Rinse and Repeat? More Evidence Needed
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Summary
Last Thursday (5/23/24), the S&P 500 recorded a one-day key reversal, from up to down. This was like what occurred in early April just prior to the S&P 500’s time and price correction. One difference, however, is that while volume expanded last Thursday, it didn’t come close to exceeding its 50-day average as it did when the key reversal occurred in April. Therefore, before labeling last Thursday’s intraday high of 5341.88 as a short-term top (it is now a resistance point), more evidence is needed—Figures 1 and 2.
As the World Turns
As the World Turns was a soap opera on CBS for 54 years, created by Irna Phillips. While I never watched it, friends in college (early ‘80s) would be glued to their TVs when it aired. From my understanding, “many of the various family members and friends depicted struggle to do the right thing” and, as Phillips wrote, "As the world turns, we know the bleakness of winter, the promise of spring, the fullness of summer, and the harvest of autumn—the cycle of life.” The “cycle of life” sounds to me like an apt description of Main Street and Wall Street. Your thoughts?
Is Wall Street’s world turning? Or has it already turned? I ask because Wall Street received relatively hawkish minutes from the latest FOMC meeting, raising concerns about potential further rate hikes. Additionally, according to JPM, “an emerging divergence between the economic and inflation surprise indices prompted fears of stagflation.” In other words, there is now fear that strong or inflationary economic data could “leave any thoughts of actually easing policy out in the cold for 2024.”
Why is this relevant?
I have repeatedly stressed that I believe “the near-term direction of interest rates play a role in the near-term direction of domestic equities.” Lower interest rates equate to higher equities, and vice versa—Figure 1. Now, however, in looking for evidence, given last week’s reaction to the Fed minutes, maybe it isn’t just the direction of interest rates that matters but also the Street’s expectations concerning interest rates. We will know how this plays out over time. But considering the often-discussed move above a 40+ year downtrend line by U.S. interest rates in 2022, we want to make this a regular part of our weekly/monthly discussions. Please reach out for an updated chart, including levels where this long-term opinion and analysis would need to change.
Figure 1: 10-year U.S. Treasury Yield Index (TNX) & inverse correlation with S&P 500 (SPX). | I realize that the correlation between interest rates and equities shown below is short-term. Yet, considering all that is going on domestically and internationally and given a significant 1-month inverse correlation between the direction of TNX and SPX, I want to keep this in front of you.
Note: The one-month inverse correlation between the direction of TNX and a small cap proxy (IWM or SML) is close to 95%. Higher interest rates act as a major headwind for small caps.
Considering the primary uptrend and the Catastrophic Stop Loss model’s favor, evidence of downside follow-through would confirm the start of another short-term price and/or time correction. New highs held without downside follow-through, however, would imply my concern over last week’s reversal, overbought condition, and expansion of New Lows (10-day average) is overblown.
Figure 2: S&P 500 with rising 21-day moving average. | Considering the abovementioned condition, please respect areas of support—green circle, dashed blue line, and green lines—based on your timeframe and tolerance for downside volatility.
Note: A key reversal day is when, in a strong uptrend, prices open to new highs (gap open), reverse sharply, and then close lower (below the previous day’s closing price). The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.
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 5.27.2024. Chart source: Stockcharts.com unless otherwise noted.
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