The 5% Streak Ends
The streak finally ended as the S&P 500 fell more than 5%. Using SPY as the proxy, the ETF had gone some 227 days without a pullback of more than 5% (closing prices). The 5.31% decline here in September is the largest since October 2020. SPY fell around 10% in September 2020, bounced into mid October and then fell another 7.50%. Note that the September-October 2020 period was the scene of the last decent correction and it lasted around 8 weeks. The current pullback is 5.31% in four weeks.
Correction targets are mostly guesswork and rarely work out as expected. As Yogi Berra famously quipped: it’s tough to make predictions, especially about the future. With that in mind, a fairly routine 8% pullback would take the S&P 500 to the 415 area, which is near the rising 200-day and 33% retracement. A one third retracement is quite normal and this is an area to watch for a bounce.
Zweig Breadth Weighs Until Reversed
Last week I noted that the S&P 500 %Above SMA indicators popped with +10% moves in absolute terms. These pops followed a serious dip in the Zweig breadth indicator, which moved below .40 and to its lowest level since May 2020. The Zweig breadth indicator equals advances / (advances + declines) for S&P 500 stocks. This dip below .40 showed the broadest downside participation since May 2020 and provided the setup for a Zweig Breadth Thrust. A subsequent move above .615 would trigger a bullish Zweig Breadth Thrust. The chart below shows the setups with red arrows and the subsequent signals with green arrows.
While the move below .40 presents us with a setup, it shows above average downside participation and this is short-term bearish. In other words, selling pressure was the strongest since May 2020 and this selling pressure needs to be reversed with a bullish signal. Until a bullish thrust, the odds favor further correction in the S&P 500 and broader market. I do not know the pattern than will form or how long it will take. The best we can do is watch for bullish signals to suggest it has ended.
Other Notes
The Composite Breadth Model (CBM) remains bullish and has been bullish since May 2020 (see Market Regime page for charts covering the CBM, yield spreads and Fed balance sheet).
Investment grade and junk grade corporate bond spreads did not tick up in September and remain at low levels (since July). There are no signs of stress in the credit markets.
The Fed balance sheet contracted by $41 billion and this is the largest contraction since July 2020. Early signs of tapering?
The 20+ Yr Treasury Bond ETF (TLT) broke down and reversed after retracing half of the prior decline (bearish).
The Gold SPDR (GLD) got an oversold bounce as the Momentum Composite dipped to -3 and StochRSI popped.
The Dollar Bullish ETF (UUP) broke out of its 2021 range and the larger pattern looks like a massive double bottom.
Oil is one of the strongest assets right now as it extends on its channel breakout and nears a 52-week high.
TLT Breaks Down after Retracement
The 20+ Yr Treasury Bond ETF (TLT) is one of these judgement calls when it comes to the bigger trend. StochClose remains bullish, but the price chart looks bearish to me. TLT fell from August to March and then retraced around half with an advance into July. A pennant formed and the pennant breakout looked bullish, until it failed. TLT broke support and became short-term oversold on Tuesday-Wednesday as the Momentum Composite dipped to -4 and -3. This could give way to an oversold bounce, but I will remain bearish on TLT given the price chart.
The green arrows show when the Momentum Composite dips to -3 or lower. There were some very short bounces after oversold conditions from August to October, but TLT did not bounce after oversold conditions from January to early March (yellow box). The trend was clearly down and the prevailing downtrend dominated. This is why it is dangerous to trade for oversold bounces when the bigger trend is down. The odds are more favorable when the bigger trend is up.
Gold Pops within Downtrend
The Gold SPDR (GLD) surged 1.8% on Thursday, but the overall trend is clearly down. The only options I see here are short-term mean-reversion bounces. The green arrows show when the Momentum Composite dips below -3 or lower and StochRSI surges above .80. The Momentum Composite dip provides the oversold setup and the StochRSI pop above .80 signals a momentum thrust. It is short-term bullish. The blue shading shows the Momo Comp hitting -3 on Wednesday and StochRSI popping above .80 on Thursday. This is an aggressive short-term setup/signal. A profit target and trailing stop should be part of the plan. Remember to plan your trade BEFORE initiating.
Dollar Hits Top of Range
The Dollar Bullish ETF (UUP) broke out of its 2021 range with a big move in September. The Dollar is largely a risk-off currency and could be benefitting from some risk aversion in the markets. The pattern since December 2020 looks like a massive double bottom (green arcs), which is really a moot point because the trend is already up.
Oil Extends on Channel Breakout
Oil edged up a little this week and further extended on its channel breakout. Oil is trading near a 52-week high and is one of the strongest assets. There is no setup right now because oil is simply in the trend-monitoring phase. The oversold setups, momentum pops and breakouts already triggered. The trend is up and higher prices are expected as long as the uptrend holds. The lower window shows the US Oil Fund (USO) hitting a new high early this week.
The DB Energy ETF (DBE) is benefiting from strength in Natural Gas, even though it is just 8% of the ETF. Natty, which is known as the widow maker, was trading near a multi-year low in July 2020 (~ $1.52) and surged above $5 this month. The trend is up and strong, but getting parabolic. The chart below shows DBE, of which 92% of its components are tied to crude oil, breaking out of a wedge in late August and hitting new highs this week.
