Minor stabilization in Banks a positive, but more is needed

For a link to my daily video, please click here.

It remains difficult to have conviction on the near-term direction of SPX, DJIA and QQQ.  Prices have stalled in all three into end of week, and remain trending down in SPX and DJIA.

NASDAQ, to its credit, remains quite positive, but has also found resistance near early February peaks.   Moving above 315 would be a positive for $QQQ, while under 305 is negative

Banks did manage some minor stabilization and KBE rallied to close positive on the week despite the recent volatility

My bottom line technical thoughts are NOT that US Equity markets are on the verge of a big selloff.  However, it will be necessary to start to see more strength out of the Banks.  This week was mildly encouraging in that regard, as the news was far worse than the actual net price change on the week for $KBE and $KRE.

My three key reasons for optimism into April have to do with the following reasons:

1. Technology relative strength and no evidence of Tech peaking despite being overbought
2. Sentiment has gotten quite negative given the recent turmoil in Banks.
3. Pre-election year seasonality remains very positive and markets are nearing one of the more bullish months of the entire year, April.

Overall, it’s thought by many that Technology cannot shoulder the entire burden.  Well, 2021 proved that largely false, as many sectors slipped, while Tech held strong.  While the index finish for 2021 was largely better than the outcome of the individual equity as more and more stocks started slipping from 52-week highs, 2023 is very different in many respects.  Namely, sentiment at the present time is bearish heading into one of the more bullish months of the year seasonally speaking.  Back in 2021, momentum was waning and uber-bullishness reigned.

Bottom line, there’s no debating what this chart shows us below, and the DJIA chart remains similar.  SPX remains in choppy consolidation, and nothing will change, barring a move back over early March highs near 4080.  Downside, however, should be limited to 3800, but there’s no guarantee at this time that prices need to fall 2-3% lower, if Banks can start to hold and QQQ can break out over $315.

Overall, I remain optimistic, but can’t rule out early week weakness next week before prices stabilize and turn higher.

KBE trying to stabilize; Closed positive for the week

In what might seem extraordinarily unlikely for the banking sector for anyone studying the rapid run-up in Credit default swaps (CDS) for Deutsche Bank and others, the S&P Bank ETF, $KBE, has closed positive for the week after churning sideways over the last five trading sessions.

The perception of “what’s happening” to the Banks this week compared to the price action of the main Bank ETF’s seems to tell a different story.   (This is not unlike Technology grinding higher while the majority of institutional investors say it’s not possible without earnings growth.)

Counter-trend DeMark exhaustion is now close on $KBE on daily and weekly basis, and we’ll merely need to see a close back over $38 to have conviction that this can work.

As I’ve stated in several recent notes, given that Technology does not show any evidence of faltering at the present, I believe any evidence of true strength out of Financials following the recent carnage would be a big positive for Equities at a time when Healthcare has started to “come alive” again.

For now, it’s proper to keep a close eye on both $KBE and $KRE.

REITS closing down at multi-year lows vs SPX demands immediate stabilization

The REIT group has been very hard hit lately, and has taken an ugly nosedive after the recent bank crisis started to show signs of spreading.

On an absolute basis, REIT ETF’s like $EWRE, the Invesco Equal-weighted Real Estate ETF, are down to last October lows which remains a very important area to hold, technically speaking. 

DeMark indicators are within 1-2 trading days possibly of daily exhaustion using metrics like TD Sequential “13 Countdown” for evidence of a possible upcoming reversal.  Moreover, weekly signals are now apparent also which bare watching for any sudden evidence of turning higher in a manner that would confirm this signal ( One weekly close greater than the close from four weeks prior)

However, relative charts of $EWRE to $RSP, the Invesco Equal-weighted S&P 500 index ETF, have broken down to multi-year lows. 

This is largely based on the recent crisis with many regional banks having become involved in commercial real estate.  Moreover, it will depend on the Banks stabilizing before they can likely begin to hold support and turn higher.

Given that relative charts have officially broken down, a snap-back rebound is necessary right away next week before having much confidence in this group rebounding, despite rates having gone materially lower in recent weeks.

Bottom line, it’s tough to trust the REIT group without evidence of banks bottoming, in the short run, technically speaking.

LQD has officially broken out vs JNK

The Ishares Iboxx Investment grade Corporate bond ETF, or $LQD, has officially broken out vs. the SPDR Bloomberg High Yield Bond ETF, or $JNK.

This normally occurs as high yield bonds start to weaken, and is one of the several ways to get a feel for what’s happening in credit, outside of studying the spreads between High yield corporates to Treasuries and/or studying CDX indices.  (Most blindly look at price action in $JNK, which is technically incorrect, given that it is dollar denominated and will move adversely on interest rate movement) (Furthermore the duration of High yield to Investment grade are normally completely different, making direct comparison difficult)

I’ve found it useful to study movement in LQD vs. JNK in ratio form, which is a purer form of seeing what’s occurring in “Investment grade”, vs. “High Yield” corporates.

A breakout in this ratio speaks to the extent that High yield is going down much more quickly than Investment grade at the moment.

However, it’s important to take note that a massive move higher in Credit default swaps (CDS) might not necessarily involve systemic risk to the underlying issuer.  Often if investors seek to hedge and/or to buy protection for their underlying stock holdings, one can do this by buying protection in CDX, instead of having to sell the stock, or consider options strategies.

Overall, this breakout would seem to indicate that a further deterioration in “high yield” is possible ( or seen this way, LQD will move up relative to JNK much more quickly)

Bottom line, this breakout over the last three years might seem problematic to some.  However, there isn’t sufficient evidence at this time to claim that issues are systemic vs being simply idiosyncratic, in my view.