The next report will be on Thursday, April 24th.
Report Headlines
- Zweig-Keltner Strategy Remains Active
- 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 Narrow as Stocks Bounce
- Fed On Hold as 3-month Yield Remains Flat
- TLT Bounces as Long-term Yields Edge Lower
Evidence is Bearish and the 10yr Yield is Rising
After hitting oversold extremes in early April, breadth indicators bounced the last few weeks with the percentage of S&P 500 stocks above their 200-day SMA hitting 36%. This also means that 66% are below their 200-day SMAs and in long-term downtrends. You cannot have a bull market with the vast majority of stocks in long-term downtrends. For reference, only 28% of S&P 1500 stocks are above their 200-day SMAs, and 38% of Nasdaq 100 stocks are above their 200-day SMAs. Again, these are bear market numbers.
Note that stocks were excessively oversold in early April when the percentage of stocks above their 200-day SMA dipped below 20%. These extreme conditions gave way to a bear market bounce the last three weeks. Keep in mind that volatility is above average in bear markets and bear market bounces can be extremely sharp. As long as the weight of the trend-following evidence remains bearish, I will consider the current bounce as a bear market bounce. For trend-following evidence, I am using the Bollinger Band breaks in the major index ETFs (SPY, QQQ, RSP) and the bearish signals in the long-term breadth indicators.
Note that the Zweig Breadth Thrust is not a trend-following indicator. It shows a sharp and material shift in upside participation within a 10 day window. ZBT signals are reversal signals that often trigger before the trend-following indicators turn bullish. While the long-term track record is good, keep in mind that the Zweig Breadth Thrust is not perfect and an exit plan is necessary. Five consecutive closes below the lower Keltner line would negate the Zweig Breadth Thrust. 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 Narrow as Stocks Bounce
The chart below shows SPY, the Junk Bond Spread ($$HYIOAS) and the BBB Bond Spread ($$BBBOAS). Yield spreads narrowed (fell) in April as stocks bounced and the risk appetite improved. The BBB spread (bottom window) fell from 1.5 to 1.31, but remains well above the breakout zone in the 1.10 area. Similarly, the Junk spread fell from 4.7 to 3.7, but remains well above the breakout zone in the 3 area. The pink lines show the 200-day SMAs. Further narrowing below these levels would show a serious improvement in confidence. For now, the mid March breakouts and widening remain the dominant features on this chart. These show high levels of stress in the credit markets and this 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.
Fed On Hold as Short-term Yields Remain Flat
Bonds surged on April 24th after dovish comments from Federal Reserve Bank of Cleveland President Beth Hammack. This increased the odds for a June rate cut. The 3-month Treasury Yield ($UST3M) edged lower the last few days, but remains near the 4.3% area, and has been stuck here all year. A move below 4.2% would show a downturn and further increase the odds for a Fed rate cut. Until such a move, the bond market reflects a Fed on hold (data dependent).
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
TLT Bounces as Long-term Yields Fall
A more dovish tone from the Fed sparked a move in the 20+ Yr Treasury Bond ETF (TLT) as it surged .84% on the 24th and rose 4.8% the last six days. Even so, the long-term trend remains down. On the weekly chart below, TLT broke rising wedge support in October and hit 52-week lows in December. There was a rebound in the first quarter, but TLT then broke the wedge line with a long black candlestick four weeks ago. The ETF is attempting to negate this breakdown with a move back above 90.20 this week. I would like to see a breakout at 92.5 before turning bullish on TLT (pink line). The bottom window shows the PPO(5,40,0) in negative territory, which means the 5-week EMA is below the 40-week EMA (downtrend).
The next chart shows the 10-yr Treasury Yield in the top window and the 30-yr Treasury Yield in the lower window. These long-term yields are a tough call because they have been stuck in trading ranges for over a year. Since late 2023, the 10yr Yield traded between 3.5 and 5 percent, while the 30yr Yield traded between 3.9 and 5.25 percent. Both are currently in the middle of these ranges. They surged four weeks ago with long white candlesticks in early April and reversed three month downswings with breakouts (channel breakout and wedge breakout). Both fell back the last three weeks, but I am not ready to call for a failed breakout. A close below 4% in the 10yr Yield and 4.4% in the 30yr Yield would argue for lower rates. For now, the three week pullback could evolve into a small flag or wedge. Upside breakouts would signal a continuation higher.
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.