The minor snapback Wednesday wasn’t unexpected given historical data concerning trading activity directly following a 4% decline. However, Tuesday’s huge downdraft looks to have paved the way for an upcoming break of September lows which should occur over the next 2-3 weeks. Volume was concentrated very heavily into downside issues which generated a very high ARMS index reading. However, my own experience following downside reversal days following a bounce is that they tend to be far more bearish than bullish. My own Elliott interpretation has a base case projection for weakness into early October and a possible $SPX decline down to a maximum level near 3685. This would accomplish something important. It would allow this most recent wave lower to mirror the decline from mid-August in both price and time. Such a decline over the next few weeks should form a trading low in early October.
Treasury Yields look to have another three weeks higher
Interestingly enough, from a DeMark perspective, this rally in yields is lining up exactly with the timeframe of early October, just like the Equity cycle we’ve been discussing.
Thus, while many are getting more and more concerned about the prospects of FOMC needing to hike at least 75 bps not only in September, but now also possibly in November, this doesn’t equate to long yields also needing to follow suit.
My interpretation of DeMark’s TD Sequential and TD Combo indicators (counter-trend tools) both show weekly Countdown counts of 10 coinciding with a Setup count of 5. In plain English, another three weeks of yields pushing higher would directly line up with a timeframe of early October for weekly Exhaustion to be complete.
Interestingly enough, monthly TD Combo 13 Countdown Sells might also be triggered in the month of October. Thus, it’s possible that daily, weekly and monthly Sells could all come together in October, coinciding with a meaningful reversal back lower in Treasury yields.
Until/unless some evidence of exhaustion in Treasury yields happens, it’s difficult to have confidence of Stock indices bottoming out. However, a big downturn in yields from slightly higher levels should also lead stocks higher from October into December, which is exactly what most cycles and sentiment (from a contrarian perspective) are suggesting can happen.
Growth has begun to drop off again vs Value and this might persist until October
In the last few weeks, Equal-weighted Technology has certainly underperformed other areas like Financials, and Discretionary and even Industrials.
This ratio chart of Ishares Growth ETF ($IVW) vs. Ishares Value ETF ($IVE) which are largely based on Large-Caps, broke down under a three-month uptrend.
This is negative for Growth in the short-term and should translate into weakness in the weeks ahead.
Importantly, this chart did improve on an intermediate-term basis given the bullish breakout back in July. Thus, while near-term weakness in Growth/Value looks probable into October, I’m skeptical that this should lead back to new lows.
Weakness into October should be a chance to pivot back to Growth and overweight vs Value, just as rates start to rollover.
Sentiment continues to get worse
JP Morgan’s Global Equity sentiment indicator has now reached the lowest levels since 2020 and continues to trend down sharply. (JPMEQGSI Index- Bloomberg)
As can be seen, this provided peaks for sentiment near prior Equity market highs in 2013, 2018 and also 2021. Conversely, this showed fear during early 2020, late 2015 as well as 2011.
While current levels might not be as extreme as what was seen back in recent years, the combination of Sentiment indices such as these trending down sharply while others like AAII continue to show a very wide disparity between Bears and Bulls looks important.
It’s thought that current bearishness should give way to capitulation a bit easier into October, and the level of negative sentiment should likely provide a cushion for indices and might not need to undercut June lows before bottoming.
Overall, a pullback to $SPX 3685 is roughly 5% lower than current levels. Any break of 3700 into the end of September/early October will be watched carefully for evidence of capitulation, drying up in selling pressure and/or fewer new lows, which for divergence purposes, should line up with a meaningful turning point for a bounce into December.
