Defensives give way again, as Technology holds strong

SPX, NASDAQ and DJIA look to be in the final stages of their decline off mid-September peaks.  Prices got briefly below June lows but held as of Tuesday’s end of day close.  The bullish case for fighting trends into next week is all centered on the following:

1. Oversold conditions.
2. Anemic breadth levels.
3. Possibility of upcoming DeMark confluence on multiple timeframes on exhaustion signals for Equities along with Treasury yields and US Dollar.
4. Cyclical lows likely by Oct 6-7 and also due into final week of October.
5. Seasonally bullish period approaching which normally results in a +1% return during October’s of Mid-Term election years.
6. Defensive underperformance.
7. Sentiment having reached near capitulatory levels.
8. Volume dislocation. 
9. Treasury Yields and US Dollar having gotten too stretched.
10. Consumer Discretionary having outperformed Consumer Staples over the last 1- and 3-month periods. 

Overall while many feel it might be best to wait, it clearly looks appealing to cover shorts and start “Dipping one’s Toes in the water” using any pullback into next week as a time to buy into the decline, expecting a meaningful bounce in October.  Downside targets lie just below 3600.

Breadth levels have reached extremes near June lows  

Don’t look now, but SPX “Percentage of Stocks above their 20, 50, and 200-day moving averages (m.a.) have now arrived at June lows.  The percentage of SPX issues above both 20 and 50-day m.a. have now breached the 3% mark on both.  This is quite extreme and normally is conducive to downside proving limited.

Furthermore, the percentage of stocks hitting new four-week lows have actually eclipsed June 2022 bottom and has reached the highest levels since 2020.

First, let’s look at this daily chart below showing this extreme breadth capitulation.  This directly followed a very robust upward breadth thrust in July, but within six weeks has now gotten down near June lows.

My thinking technically is that despite many fretting over June lows possibly being breached, this shouldn’t translate into much selling given that most things have already dropped substantially.

Staples joining Utilities and REITS in weakening substantially

Following up my discussion with Utilities in the last 24 hours, we’ve also begun to see extreme underperformance in the Consumer Staples group.  This is the first instance of Consumer Staples weakening down to a near 1-year low as shown by Invesco’s Equal-weighted Consumer Staples ETF ($RHS) pulling back to the lowest levels since last October on its weekly close.

Some might argue this could be a Head and Shoulders breakdown, and I would have to agree on a weekly close under $156.56 ($XLP under $68.22).

It’s been difficult to find Staples a “Safe Haven” trade with stocks like $CHD, $MKC, $EL, $KHC, $SYY, $TSN, $TAP, $MO, $BF/B, $KO, and $COST all down more than 10% in the rolling one-month period. 

It’s normally quite important when the Staples group starts to act quite strong as was the case back from January-February 2020 or near early 2022 highs.  (This often precludes a stock market reversal from Up to Down) Conversely, when Defensives start to underperform, and similar to Tuesday’s (9/27) trading, show Technology having turned in positive performance on the day, (while Utilities and Staples are both down -1.5%) this kind of lagging typically happens near market bottoms.

While some evidence of a sharp reversal in stock indices on good volume and breadth will be necessary over the next 5-7 trading days, I’m confident that Markets likely make a good trading low in October.

Breadth contraction in McClellan’s Oscillator is now down to the lowest since 2020. 

Interestingly enough, one of the most closely watched gauges for Breadth has ow reached the lowest levels in over two years’ time.  The McClellan Oscillator, which measures a cumulative measure of Net Advances, has now reached extreme levels.

Importantly, this indicator can remain positive or negative for extended periods during strong uptrends or downtrends.  Thus, it’s important to watch for 1) Divergences and also 2) Breadth thrusts from oversold levels to make sense of trying to time a market low.  Many consider this to be similar to a MACD (Moving Average Convergence Divergence) signal of the Advance/Decline, and while trending down sharply, it’s my view that an upcoming reversal based on other methods should arrive within the next week.

One should watch for times when the 19-day Exponential Moving average crosses the 39-day Exponential moving average, as laid out by the indicators creator Sherman McClellan.

Bottom line, one should be on the Lookout for upward breadth acceleration on any sign of a market bottom in early October.  Stay tuned.