A Date With The December Lows?

The 1.5% decline in the S&P 500 last Tuesday raised the bar for a positive close last week. Even the slightly encouraging jobs report Friday could not support the market as the slide in the stock of SVB Financial Group (SVB) ended with its closure on Friday.

The weekend news has been filled with conjecture over what the global impact might be on the financial markets in the coming week. The challenge of some tech companies making their payroll is already being addressed in the U.K. and Singapore. With the CPI report out on Tuesday the stock market will have further challenges to face.

The action in the bond market last week also surprised many as the yield on the 10-Year T-Note has dropped from the March 2^nd high at 4.091% to a low Friday of 3.674%. The daily starc- band has been exceeded so the yield is extended on the downside with resistance in the 3.90%-4.00% area.

The MACDs have turned negative after forming lower highs, line c, and a negative divergence was also noted in the MACD-His. Even if yields move rebound in the next week it appears that yields have topped with next downside targets in the 3.387-3.500% area. The US Dollar also turned lower last week which should take some pressure off the stock market.

It is the sharp two-day reversal in yields that spooked bond traders as the yield on the two-year treasury yield declined 45 basis points in two days. The research by Bespoke Investment Group found 79 similar instances in the past 50 years. They found that “With two exceptions, in 1987 and 1989, all of those episodes were either during or within six months of a US recession.”

Investors are unlikely to be encouraged by this historical analysis or the scorecard for last week’s trading. All of the prior week’s gains were reversed as the iShares Russell 2000 was down 8% followed by a 6% drop in the Dow Jones Transportation Average. In comparison, the SPDR S&P Regional Bank Index (KRE) was down 16%.

The S&P 500 lost 4.6% for the week just a bit worse than the 4.4% decline in the Dow Jones Industrial Average which is now down 3.7% year-to-date (YTD). The S&P 500 is close to turning negative on a YTD basis.

Even though the Nasdaq 100 was 3.8% lower last week it is still the YTD leader as it is up 8.1%. The SPDR Gold Trust was the only one of these monitored markets to close the week higher. For the second time in the past three weeks, the NYSE advance/decline ratios were very negative with only 389 issues advancing and 2871 declining.

On both Thursday and Friday, the ratios were over 5-1 negative which has pushed most of the short term A-D ratios into oversold territory. On Thursday over 90% of the S&P 500 and Nasdaq 100 stocks were lower on the day. The NYSE A-D Osc closed the week at -1372 and it reached over -1800 at the June and late September lows. The McClellan oscillator closed the week at -297 which is the lowest reading since -403 on September 26, 2022.

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While the short-term A/D indicators do favor a rebound this week, maybe as much as 1-2%, the technical damage to the weekly A/D lines was significant. For the Spyder Trust (SPY) the next key support to watch is the December low at $374.77.

The positives from last week in both the weekly and daily A/D lines was reversed by this week’s action. The S&P 500 vance/Decline line had bounced from its EMA last week but has plunged and is now close to the December lows.

The change in the NYSE Stocks Only A/D line was even more severe as the uptrend, line c, and its EMA were both broken. This was after previously breaking its downtrend, line b, which was positive based on the intermediate-term analysis. The NYSE All A/D line has also violated its EMA but is still above its support at line e. The daily A/D lines were all positive with the close on March 3^rd but turned negative last Tuesday and broke further support with Thursday’s close.

The number of Nasdaq Composite and NYSE Composite stocks making new 52 week lows both expanded sharply on Friday. There were 547 New Lows on the Nasdaq Composite which is the highest reading since last October. It is still well below the May 2022 reading of 1650 but was above the October high, line b, and may be signaling a change in trend. There were no divergences in the New Highs which peaked with prices at the start of February. The Nasdaq Composite has next good support in the 10,800 area, line a.

All eleven sectors were lower last week with the Consumer Staples Select (XLP) holding up the best down just 2%. In contrast, the Financial Sector (XLF) was down 8.5%. There were not any severe warnings from the prior week about XLF as it was higher on March 3^rd. The weekly RS was barely above its WMA while the OBV was negative. XLF has closed below the weekly starc- with next good support in the $30-$31 area.

It was not really until Thursday’s trading that the level of selling in the bank and financial ETFs rose to an alarming level. In terms of this week’s action, it is hard to gauge the potential ripple effects of the SVB collapse. Unfortunately, many may not believe the official appraisal of the situation that will not help.

One thing is clear and that is that my bullish appraisal last week for the stock market in March now looks wrong. I would expect a rally in the week ahead for those who wish to adjust the weightings in their portfolio. Be sure to have your stops in place before the market opens.

The December lows at $374.77 in the SPY and $259.73 in the Invesco QQQ Trust (QQQ) are the key support levels to watch. I continue to expect the overall stock market to be higher in 2023 but the path there now looks like it will be more difficult.