KEY
TAKEAWAYS
- Weaker value momentum suggests an exhaustion of consumers.
- The VIX pushed again above 20 this week, indicating a better chance of a value correction.
- The equal-weighted S&P 500 made a brand new all-time excessive in August, however that was not echoed with a brand new excessive from the Nasdaq 100.
This week, the market appeared to shift dramatically from “stalling out at all-time highs” to extra of a “large time risk-off selloff transfer” type of state of affairs. The warning indicators have been constructing in August, however, to date, September is ringing all types of market topping alarm bells. Let’s overview three key charts that inform the story of this shift in investor sentiment.
Weaker Momentum Signifies Bulls are Exhausted
When the S&P 500 first examined the 5650 stage in July, the day by day RSI pushed above 80 to bolster the robust constructive momentum. Then, when that stage was retested in late August, the RSI was down round 60.
What gave the impression to be a possible pause earlier than an upside breakout now appears to be a confirmed double high sample with weakening momentum traits. This means an exhaustion of bullish sentiment and appears awfully just like earlier market tops.
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To be clear, the S&P 500 nonetheless stays inside 5% of an all-time excessive. However with the SPX down over 4% this week, and the Nasdaq 100 down virtually 6%, bears seems to be again in charge of the main market averages.
Elevated Volatility Implies Elevated Dangers
I used to be tremendous shocked to see the VIX come again right down to the mid-teens in mid-August after spiking to considered one of its highest ranges in historical past. By means of late August, the VIX remained under the 20 stage, suggesting a low-volatility atmosphere.
This week, the VIX pushed again above that essential 20 stage, signaling elevated uncertainty and due to this fact elevated threat for shares. Each day the VIX stays above 20 ought to give much less consolation to bulls cautiously on the lookout for a dramatic upside reversal.
Newer Dow Principle Flashes Bearish Non-Affirmation
Lastly, we are able to look what I name the “Newer Dow Principle,” an adaptation of Charles Dow’s foundational work relating the actions of two main fairness indexes. Whereas Dow used the Dow Transports and Dow Railroads to gauge financial energy, I like to think about an equal-weighted S&P 500 and equal-weighted Nasdaq 100 to match the efficiency of “outdated economic system” versus “new economic system” names.
During the last six weeks, whereas the S&P 500 itself has stalled out across the 5650 stage, the Invesco S&P 500 Equal Weight ETF (RSP) has really achieved a brand new all-time excessive. On the identical time, the Direxion Nasdaq 100 Equal Weighted ETF (QQQE) has really displayed a decrease peak. Dow known as this configuration a “bearish non-confirmation,” the place a brand new excessive from one index was not confirmed by the worth motion of one other. And this bearish non-confirmation is a typical characteristic of main market peaks.
As a trend-follower, I’d argue that the first development within the S&P 500 stays bullish so long as the index stays above the August swing low round 5200. However given the rising indicators of degradation in these key macro charts, the chance of additional draw back in September feels very actual.
RR#6,
Dave
P.S. Able to improve your funding course of? Try my free behavioral investing course!
David Keller, CMT
Chief Market Strategist
StockCharts.com
Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary state of affairs, or with out consulting a monetary skilled.
The creator doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the creator and don’t in any means symbolize the views or opinions of some other particular person or entity.
David Keller, CMT is Chief Market Strategist at StockCharts.com, the place he helps traders reduce behavioral biases via technical evaluation. He’s a frequent host on StockCharts TV, and he relates mindfulness strategies to investor resolution making in his weblog, The Conscious Investor.
David can also be President and Chief Strategist at Sierra Alpha Analysis LLC, a boutique funding analysis agency targeted on managing threat via market consciousness. He combines the strengths of technical evaluation, behavioral finance, and knowledge visualization to determine funding alternatives and enrich relationships between advisors and shoppers.
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