The next report will be on Thursday, May 8th.
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 Rebound
- Fed On Hold as 3-month Yield Remains Flat
- TLT Remains with Downtrend and Wedge Break
Long-term Trend and Breadth are Bearish
The long-term evidence turned bearish in mid March and breadth indicators reached oversold extremes in early April. Stocks surged the last few weeks and the breadth indicators rebounded from April 9th to May 2nd. Despite a bullish Zweig Breadth Thrust, the long-term trends and breadth indicators remain bearish. This suggests that the April rebound is a bear market bounce.
Long-term breadth indicators are trend-following in nature, which means signals trigger after a meaningful move. A meaningful decline triggered bearish signals in mid March and these signals have yet to be reversed. At the very least, we need to see the percentage of stocks above their 200-day SMA break above 60% for bullish signals. Current values are: 40% for S&P 500 stocks, 45% for Nasdaq 100 stocks and just 31% for S&P 1500 stocks. Nasdaq 100 stocks are leading the current rebound, but the vast majority of stocks are below their 200-day SMAs (in long-term downtrends).
Zweig Breadth Thrust Update
A Zweig Breadth Thrust triggered on April 24th [1] as the 10-day EMA of S&P 1500 AD Percent ($SUPADP) surged above +23%. SPY also moved above the lower Keltner line (65,2,65). The breadth thrust is bullish as long as SPY holds the lower Keltner line. Five consecutive closes below the lower Keltner line would negate the Zweig Breadth Thrust. See this report for details on the ZBT Keltner strategy.
Note that the Zweig Breadth Thrust is not a trend-following indicator. It shows a sharp and material shift in upside participation within a 10 day window. ZBT signals are reversal signals that often trigger before the trend-following indicators turn bullish. While the long-term track record is good, keep in mind that the Zweig Breadth Thrust is not perfect and an exit plan is necessary.
SPY in Downtrend and Breadth Net Bearish since March 12th
SPY moved into a downtrend on March 10th and the breadth indicators turned net bearish on March 12th (2 of 3). The third breadth indicator, S&P 500 High-Low% ($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 Rebound
The chart below shows SPY, the Junk Bond Spread ($$HYIOAS) and the BBB Bond Spread ($$BBBOAS). Yield spreads sharply narrowed (fell) as stocks rebounded the last four weeks. 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 3.6, but remains well above its 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
The 3-month Treasury Yield ($UST3M) remains in the 4.3% area, and stuck here all year. The decline from July to December argued for easing, while this year’s sideways move suggests the Fed is on hold. 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 Remains with Downtrend and Wedge Break
We can expect some fireworks today because the Fed makes its policy statement this afternoon. 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 five weeks ago. The ETF consolidated after this breakdown, which means the breakdown remains in play (bearish). 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 five weeks ago with long white candlesticks in early April and reversed three month downswings with breakouts (channel breakout and wedge breakout). At this point, the channel/wedge breakouts in early April are bullish until proven otherwise. A close below 4% in the 10yr Yield and 4.4% in the 30yr Yield would negate these signals, and argue for lower rates. Short-term, both fell back with small falling flags and are attempting breakouts this week.
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.