The next report will be on Thursday, April 17th.
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 Remain Wide (Stress)
- Short-term Yields Point to a Dovish Fed
- 10yr Yield Battles Breakout Zone
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, the other three indicators triggered 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.
Even with the big rebound last week, the vast majority of stocks are below their 200 and 150 day SMAs. Only 23% of S&P 1500 stocks are above their 200-day SMAs (77% below), and only 20% are above their 150-day SMAs (80% below). New lows expanded last week with over 30% of S&P 1500 stocks hitting 52-week lows. Even though this number returned to the zero area with the oversold bounce, over 30% of S&P 1500 stocks are in strong downtrends (still near 52-week lows). This is clearly not a bull market environment.
The market regime report covers long-term trend following indicators: Bollinger Bands (125,1), %Above 200-day SMA, %Above 150-day SMA and High-Low Percent. As with all trend-following indicators, these trigger signals after price has bottomed or topped. They lag. We need to see the %Above 200-day SMA indicators clear 60% to think bullish again (in a trend-following sense). I am also watching the thrust indicators, which trigger with sudden and sharp reversals. They will be the first to trigger, but we have yet to see signals here either. See this report for details. [1]
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, S&P 500 High-Low% ($SPXHLP), triggered bearish on March 31st.
- SPY broke the lower Bollinger Band (125,1) on March 10th
- SPX %Above 200-day SMA broke below 40% on March 12th
- SPX %Above 150-day SMA broke below 30% on March 12th
- SPX High-Low Percent Hit -10% on April 3rd
About the Major index ETFs and Breadth Signals
The top window on each breadth chart shows the corresponding major index ETF with Bollinger Bands (125,1). An uptrend signals when the ETF breaks above the upper Bollinger Band and a downtrend signals with a break below the lower band. The index ETFs are the S&P 500 SPDR (SPY), the Nasdaq 100 ETF (QQQ) and the S&P 500 EW ETF (RSP).
Each index has three breadth indicators. SPY uses S&P 500 breadth, QQQ uses Nasdaq 100 breadth and RSP uses S&P 1500 breadth. The percentage of stocks above the 200-day SMA triggers bullish with a move above 60% and bearish with a move below 40%. The percentage of stocks above their 150-day SMAs triggers bullish with a move above 70% and bearish with a move below 30%. High-Low Percent triggers bullish with a move above +10% and bearish with a move below -10%. High-Low Percent is the percentage of stocks making 52-week highs less the percentage making 52-week lows.
These bullish/bearish signal thresholds are designed to identify significant changes in the stock market (bull market or bear market). As trend-following signals, they will lag and there will be whipsaws. Long-term, these signals keep us on the right side of the market. The idea is to be invested during bull markets (risk-on) and in cash during bear markets (risk-off).
QQQ in Downtrend and Breadth Net Bearish since March 31st
QQQ moved into a downtrend on March 10th and the breadth indicators turned net bearish on March 31st (2 of 3). The third breadth indicator, Nasdaq 100 Percent Above 150-day SMA ($NDXA150R), triggered bearish on April 4th.
- 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 Remain Wide (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. There was a reprieve as stocks rebounded last week, but these spreads remain at levels that reflect stress in the credit markets. This sharp two-month widening is comparable to what we saw during the 2022 bear market. Bond traders are demanding a higher risk-premium to hold corporate bonds (vs lower risk Treasury bonds). This means they are more concerned with the economy and the issuer’s ability to repay its obligation, which is negative for stocks.
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
Bonds are Anyone's Guess
The Treasury bond market is all over the place in April as the 7-10 Yr Treasury Bond ETF (bottom window) surged 3% into early April and then plunged 4%. Conversely, the 10-yr Treasury Yield plunged below 4% (40) and then surged above 4.5% (45). The next directional move is anyone’s guess. The Trump administration wants lower yields, but the bond vigilantes may have other ideas. Picking the winner is more a function of game theory than chart analysis. The same goes for the tariff war: this is more about game theory than anything else (who will blink first).
Ignoring everything else, I view the 10-yr Treasury Yield chart as bullish (higher yields) and the 7-10 Yr Treasury Bond ETF (IEF) chart as bearish (lower bond prices). $TNX hit a new high in early January, and then corrected into April with a falling channel and 61.8% retracement. $TNX broke out with a surge last week. This breakout signals a continuation of the prior advance, and targets new highs. Even though the yield fell back over the last two days, I would allow for some volatility and a pullback after the sharp short-term surge.
In the lower window, IEF fell from September to January and then retraced around 61.8% with a rising channel. The ETF broke support at 94 with a sharp decline last week and then rebounded this week. IEF was short-term oversold last week so I view this week’s bounce as an oversold bounce. The overall chart shows a decline, counter-trend bounced and break at 94. This break signals a continuation of the September-January decline and argues for new lows.
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.