Collapse of US stock market technical indicators flash warning signal

Flags are seen outside the New York Stock Exchange (NYSE) in New York, where markets swirled after Russia continues to attack Ukraine, in New York, United States, February 24 2022. REUTERS/Caitlin Ochs/File Photo

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NEW YORK, Sept 9 (Reuters) – Indicators used by investors to gauge the health of the U.S. stock market have deteriorated, fueling fears that the benchmark index could retrace to its mid-June low.

The S&P 500 (.SPX) is down 7% since mid-August after a strong summer rally, battered by expectations that the Federal Reserve will raise rates more than expected in its fight to lower consumer prices from their 40-year highs. Read more

The decline in equities has given more reason for caution to those who follow market phenomena such as breadth, momentum and trading patterns to inform their investment decisions. While many of these indicators painted a bullish picture just a few weeks ago, they tell a less bullish story now, raising fears that this year’s selloff in the markets may not be over. Read more

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“I had to technically downgrade the market, given the severity of the decline over the past three weeks,” said John Kolovos, chief technical strategist at Macro Risk Advisors.

“The odds of a market bottom in June have diminished to that of little better than a coin toss at this point.”

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Among the factors considered by investors is the breadth of the market, which indicates whether a significant number of stocks are rising or falling in unison. The positive magnitude of the market, when more stocks are up than down, indicates a high degree of confidence among stock bulls.

Recently, the magnitude of the market has started to send worrying signals. The percentage of stocks trading above their 50-day moving average in the Russell 3000 (.RUA) has fallen to around 30% from around 86% in mid-August.

“We want to see this indicator stabilize where it is right now,” Kolovos said. “We really don’t want to see it go much below 25%.”

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Meanwhile, the 15-day moving average of the percentage of S&P 500 stocks hitting new three-month lows – another measure of the stock market’s breadth – climbed to around 10% from just above. above zero in mid-August, according to data from Thrasher Analytics. It was around 60% at the market low in June.

“We are watching if we continue to see expansion in a bearish magnitude,” said Andrew Thrasher, the company’s founder. “If we see new expanding lows, that will put downward pressure on the index.”

The S&P 500 stayed below its 200-DMA for five months, the longest such streak since May 2009

Additionally, the S&P 500 has remained below its 200-day moving average for five months now, the longest such streak since May 2009.

Historically, the index fell -3.56% in September while below the 200-day moving average in a year in which the United States holds midterm elections, as it will in 2022, according to BofA Global Research. The index is up about 1% since the beginning of the month.

Nasdaq Compound

Tech stocks have been particularly hard hit in recent weeks, with the tech-heavy Nasdaq Composite (.IXIC) down around 10% since mid-August.

Some chart watchers see more trouble ahead for the index, which recently formed a bullish-to-bearish trend reversal known as a “head and shoulders top.”

The index has already broken through the so-called cleavage of the head and shoulders formation earlier this year, a bearish development. A drop from its recent low of around 10,500 could open the Nasdaq for a move to 8,800, said ICAP analyst Brian LaRose. The index closed Thursday at 11,862.

Treasury yields have shown a strong negative correlation with equities this year

Of course, technicals can improve or deteriorate as markets swing and investors adjust their expectations based on factors such as the path of bond yields, which are determined by monetary policy expectations and have closely followed the performance of equities this year.

The yield on the benchmark 10-year Treasury bond hit a high of nearly 3.5% on June 14, just before the S&P 500 hit its recent low.

While equities rebounded as yields fell over the summer, a recent rebound in yields accompanied the pullback in equities this month, with the 10-year yield now hovering around its highest level since June 16.

Meanwhile, real yields, which snuff out inflation and are seen as a key driver of risky asset prices, stood earlier this week at 0.88%, near their highest level since 2019. read the following

The yields have “huge implications for what could happen in the coming months,” said Mark Newton, technical strategist at Fundstrat. “I think yields are very close to peaking and should start to move up.”

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Reporting by Saqib Iqbal Ahmed in New York Editing by Ira Iosebashvili and Matthew Lewis

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