The next report will be on Thursday, April 3rd.
Report Headlines
- The Weight of the Evidence is Bearish for Stocks
- SPY in Downtrend and Breadth Net Bearish since March 12th
- QQQ in Downtrend and Breadth Net Bearish since March 31st
- RSP in Downtrend and Breadth Net Bearish since March 11th
- Yield Spreads Widen to 52-week Highs (stress)
- Short-term Yields Point to a Dovish Fed
- 10yr Yield Goes for Breakout, Even as Stocks Plunge
Bearish Until Proven Otherwise
The weight of the evidence turned bearish in mid March and remains bearish. First, SPY, QQQ and RSP reversed their long-term uptrends with Bollinger Band breaks in early March. Second, breadth indicators turned majority bearish in mid March (6 of 9). With further weakness into early April, all nine breadth indicators are now bearish. Third, yield spreads broke out on March 11th to show stress in the credit markets. These spreads surged into early April and stress levels are at the highest levels since 2023.
Is this the start of a bear market similar to those seen in 2002-2003 and 2008-2009? Nobody really knows, but I am seeing similarities with 2008. All we really know is the current situation, and the current weight of the evidence is bearish. This means stocks have above-average risk and negative outcomes are more likely. I will adhere to Dow Theory by accepting the evidence until it is proven otherwise (turns bullish again).
Speaking of Dow Theory, the late Richard Russel used to say that the biggest winner in a bear is the one who loses the least. This is certainly looking like the case now as many commodities broke down last week and moved into long-term downtrends. European, Asian and Latin American indices moved lower. Long-term bonds are also looking fragile and Bitcoin moved below its March low. Sometimes cash is king.
As you will see on the charts below, fewer than 20% of S&P 500, Nasdaq 100 and S&P 1500 stocks are above their 200-day SMAs. While these extremes show a potential oversold condition, they also reflect broad downside participation. Over 80% of stocks are in long-term downtrends. High-Low Percent also plunged below 30% for all three indexes, which is an extreme that could give way to a bounce. However, this also tells us that more than 30% of stocks hit new lows and stocks hitting new lows are in strong downtrends. More than 80% of stocks are in long-term downtrends and more than 30% hit new lows. These are bear market numbers.
SPY in Downtrend and Breadth Net Bearish since March 12th
SPY moved into a downtrend on March 10th and the breadth indicators turned net bearish on March 12th (2 of 3). The third breadth indicator triggered bearish last week.
- SPY broke the lower Bollinger Band (125,1) on March 10th
- SPX %Above 200-day SMA broke below 40% on March 12th
- SPX %Above 150-day SMA broke below 30% on March 12th
- SPX High-Low Percent Hit -10% on April 3rd
About the Major index ETFs and Breadth Signals
The top window on each breadth chart shows the corresponding major index ETF with Bollinger Bands (125,1). An uptrend signals when the ETF breaks above the upper Bollinger Band and a downtrend signals with a break below the lower band. The index ETFs are the S&P 500 SPDR (SPY), the Nasdaq 100 ETF (QQQ) and the S&P 500 EW ETF (RSP).
Each index has three breadth indicators. SPY uses S&P 500 breadth, QQQ uses Nasdaq 100 breadth and RSP uses S&P 1500 breadth. The percentage of stocks above the 200-day SMA triggers bullish with a move above 60% and bearish with a move below 40%. The percentage of stocks above their 150-day SMAs triggers bullish with a move above 70% and bearish with a move below 30%. High-Low Percent triggers bullish with a move above +10% and bearish with a move below -10%. High-Low Percent is the percentage of stocks making 52-week highs less the percentage making 52-week lows.
These bullish/bearish signal thresholds are designed to identify significant changes in the stock market (bull market or bear market). As trend-following signals, they will lag and there will be whipsaws. Long-term, these signals keep us on the right side of the market. The idea is to be invested during bull markets (risk-on) and in cash during bear markets (risk-off).
QQQ in Downtrend and Breadth Net Bearish since March 31st
QQQ moved into a downtrend on March 10th and the breadth indicators turned net bearish on March 31st (2 of 3). The third breadth indicator triggered bearish last week.
- QQQ broke the lower Bollinger Band (125,1) on March 10th
- NDX %Above 200-day SMA broke below 40% on March 12th
- NDX %Above 150-day SMA broke below 30% on April 4th
- NDX High-Low Percent Hit -10% on March 31st
RSP in Downtrend and Breadth Net Bearish since March 11th
The S&P 500 EW ETF (RSP) moved into a downtrend on March 4th and the breadth indicators turned net bearish on March 11th (3 of 3).
- RSP broke the lower Bollinger Band (125,1) on March 4th
- S&P 1500 %Above 200-day SMA broke below 40% on March 11th
- S&P 1500 %Above 150-day SMA broke below 30% on March 11th
- S&P 1500 High-Low Percent broke below -10% on March 4th
Yield Spreads Widen to 52-week Highs (stress)
The chart below shows SPY, the Junk Bond Spread ($$HYIOAS) and the BBB Bond Spread ($$BBBOAS). Both spreads broke out in mid March and widened (rose) to their highest levels since 2023. This steep widening shows serious stress in the credit markets and I view this as negative for stocks. Bond traders are demanding a higher risk-premium to hold bonds that are riskier than US Treasuries. This means they are more concerned with the economy and the issuer’s ability to repay its obligation.
The yield spread is the difference between the Junk Bond Yield or BBB Bond Yield and a comparable Treasury Bond Yield. Junk and BBB bonds represent risk assets, while Treasuries represent relative safe-havens. The spread is the risk premium for holding the riskier assets. Narrow/narrowing spreads show confidence and this is bullish for stocks. Wide/widening spreads show stress and this is negative for stocks.
Short-term Yields Point to a Dovish Fed
The top window shows the 3-month Treasury Yield ($UST3M) falling from July to December and then moving sideways in 2025. This key short-term rate has yet to turn up and remains in a downtrend, which points to a dovish Fed. A downturn from here would suggest an even more dovish Fed. Conversely, an upturn and breakout would point to a hawkish Fed. The assumption here is that the bond market and short-term rates lead the Fed and foreshadow policy.
The middle window shows the Fed Funds Target Rate ($$FEDTGT) falling from September to December as the Fed cut rates (dovish). This Fed Funds target rate flattened this year, but has yet to turn up, which means the Fed has yet to raise rates (officially change their stance).
Several factors influence short-term Treasury yields, but they are still closely aligned with Fed policy and often lead the Fed. This means the yield often peaks (troughs) and turns down (up) before the Fed starts to lower (raise) rates. We use the 3-month Treasury yield to identify current Fed policy and anticipate the next Fed move
10yr Yield Goes for Breakout, Even as Stocks Plunge
The 10-yr Treasury Yield broke down in February and moved lower into early April. Note that bonds rise when yields fall. This rotation showed money moving from riskier stocks to safe-haven bonds, which is normal in a bear market. Alas, nothing is normal these days. This dynamic suddenly changed as the 10-yr Yield surged the last three days and exceeded its late March high (44 on the chart). Rates are rising as stocks plunge and this is a double negative.
The bottom window shows the 7-10 Yr Treasury Bond ETF (IEF) with a mirror image. IEF started an uptrend with the breakout in February and surged above 97 in early April. All fine and good. IEF then plunged the last three days and is testing the March lows (support at 94). This shows money moving out of “safe-haven” bonds, which is pushing up Treasury yields. IEF is at a moment of truth and a break below 94 would reverse the upswing since January.
Several factors influence long-term Treasury yields, including growth expectations, inflation expectations, government debt levels, tariffs and foreign bond holders. The 10-yr Treasury Yield typically falls when the economic outlook dims and/or inflation expectations rise. Conversely, the yield typically rises when the economic outlook is bright and/or inflation expectation fall.
