Video and Report Headlines
- Leaders Take a Hit
- A Recipe for Volatility
- BBB Yield Spread Breaks Out
- Broad Market ETF Hit New Lows for 2023
- A Steep Downtrend for SPY
- An Immediate Downtrend for QQQ
- XLK Remains with Flag Break
- Semiconductor ETF Extends Lower
- Software ETF Fails to Hold Breakout
- Uranium ETF Corrects after Big Surge
- Aerospace & Defense ETF Hits Support-Reversal Zone
The next Chart Trader will be posted on Thursday, October 26th.
The weight of the evidence is bearish for stocks and deteriorating even further. Around 70% of S&P 500 stocks are below their 200-day SMAs. Some 26.4% of S&P 1500 stocks are above their 200-day SMAs, which means 73.5% are below. This is the most since October 2022. Also note that 52-week lows are seriously outpacing 52-week highs. S&P 500 High-Low Percent hit -12% on Monday and S&P 1500 High-Low Percent hit -14.43%. These are bear market numbers. A bottom in stocks is often preceded by an improvement in breadth. We are not seeing that right now and this indicates that the market has yet to hit bottom.
Leaders Take a Hit
Some of the leading groups were hit over the last five days:
- Energy SPDR (XLE) down 1.54%
- Communication Services SPDR (XLC) down 1.88%
- Aerospace & Defense ETF (PPA) down 3.07%
- Insurance ETF (KIE) down 4.60%
- Cyber Security ETF (HACK) down 4.75%
The broad market environment is the single biggest influence on a stock’s performance. Some stocks and ETFs will buck the selling pressure, but most (80%) ultimately succumb to the bear. KIE and HACK hit 52-week highs in mid October and were leading. Even so, both fell over 4% the last five days. Correlations rise during bear markets, which means more stocks and groups participate on the downside. Trade accordingly.
A Recipe for Volatility
The S&P 500 closed below its rising 200-day SMA for the first time since March. This moving average is often a battle zone that can foreshadow a volatile period. The chart below shows the 200-day as a battle zone with 11 crosses from late January to early April 2022 (red shading). There was a whipsaw cross on November 30th (blue shading) and cross with follow through in late January 2023 (green shading). Notice that the index tested the 200-day SMA with a whipsaw cross in March 2023.
BBB Yield Spread Breaks Out
The Junk and CCC yield spreads broke out in early October as they exceeded their July highs. This means yield spreads are widening and stress levels are increasing in the credit markets. BBB bonds represent the lowest rated investment grade bonds. The lower window shows the BBB spread turning up in late September and breaking its July high (red line) this week. This shows further widening and more stress in the credit markets. This is negative for stocks.
Broad Market ETFs Hit New Lows for 2023
The six charts below capture six market segments:
- The S&P 500 SPDR (SPY) for large-caps
- The S&P 500 EW ETF (RSP) for the average SPX stock
- The Nasdaq 100 ETF (QQQ) for large-cap techs
- The Equal-weight Nasdaq 100 ETF (QQEW) for the average NDX stock
- The S&P MidCap 400 SPDR (MDY) for mid-caps
- The Russell 2000 ETF (IWM) for small-caps
In the upper left corner, we can see SPY closing below its 200-day SMA for the first time since March. Below SPY, we can see the equal-weight version (RSP) trading at its lowest level of the year (2023). The average stock in the S&P 500 is hurting. QQQ (upper middle) is the only chart with a normal looking correction (falling wedge). QQQ is also the only one above its 200-day SMA.
Below QQQ, we can see QQEW with a steeper falling wedge and a close below the 200-day SMA. The average stock in the Nasdaq 100 is performing worst than the large-caps. On the top right, the S&P MidCap 400 SPDR broke below its March low and is trading at its lowest level of the year. The Russell 2000 ETF is the weakest of the group with a 52-week low on Monday.
In short, QQQ is the only one of the major index ETFs with a potentially bullish chart. The other five are below their 200-day SMAs. Two of the five are at their lowest levels of the year and one is at a 52-week low. Life outside of QQQ is rough.
A Steep Downtrend for SPY
The next chart shows SPY with a steep downtrend since August (red dashed lines). Most recently, the ETF broke short-term support last week and fell towards the lower line of the falling channel. SPY is short-term oversold because it fell 3.57% the last four days (see the red bars on the ROC indicator). SPY is also near the top of a support zone marked by broken resistance and the 50% retracement line (blue shading). This could give way to an oversold bounce, but the bigger trend is down with the October highs marking key resistance.
An Immediate Downtrend for QQQ
QQQ sports the least dirty shirt in a pile of dirty shirts. The immediate trend is down with the falling wedge defining this downtrend. I am marking resistance at the October high (373). A breakout here would reverse the downtrend. The indicator window shows RSI with its bull and bear ranges. RSI is currently in a bear range (20-60) and a break above 60 would turn momentum bullish again.
Short-term, QQQ fell 4.5% in seven days and closed up a fraction on Monday (.3%). As with SPY, the ETF was short-term oversold after this decline. QQQ was also trading near the September lows, which could offer support. The stage is set for an oversold bounce, but it is still just an oversold bounce within a bigger downtrend and within a bear market environment.
Chart Analysis, Setups and Trading Ideas
XLK and SOXX In Downtrends
Software ETF Fails to Hold Breakout
URA Corrects after Big Surge
Aerospace & Defense ETF Hits Support-Reversal Zone
The Aerospace & Defense ETF (PPA) surged 8% in early October, stalled for a week and fell with the rest of the market the last four days. The lesson here: PPA is still part of the stock market and not immune to broad market weakness. PPA fell back to a support-reversal zone marked by the 50% retracement, breakout level and gap zone (blue shading). The 8% surge is two steps forward and the four day decline is one step backward. PPA is in the falling knife category now, but this is the area to watch for firming and a short-term reversal.
