US stock market technical indicators are weakening warning sign

US stock market technical indicators are weakening warning sign
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By Saqib Iqbal Ahmed

NEW YORK (Reuters) – The gauge investors use to gauge the health of the U.S. stock market has worsened, raising concerns that the benchmark index could revisit bear market lows in mid-June.

The S&P 500 has fallen 7% since mid-August after a sharp summer rally on expectations that the Federal Reserve will raise interest rates higher than expected in its fight to keep consumer prices from a four-year high.

The pullback in stocks has given those who watch market events such as breadth, momentum and trading patterns to inform their investment decisions more reason to be cautious. While many of these indicators painted an upbeat picture a few weeks ago, they are now telling less bullish stories, raising concerns in markets that this year’s selloff may not be over.

“Given how severe the decline has been over the last three weeks, I have to bear the market down technically,” said John Kolovos, chief technical strategist at Macro Risk Advisors.

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

Among the factors investors study is market breadth, which indicates whether a significant number of stocks have moved up or down together. Positive market breadth indicates a high degree of confidence among equity bulls when more stocks advance than decline.

Recently, the market breadth has started to send disturbing signals. The percentage of stocks in the Russell 3000 trading above their 50-day moving average has fallen to about 30% from about 86% in mid-August.

“We want to see that rate stabilize where it is now,” Kolovos said. “We really don’t want to see it drop more than 25%.”

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

“We’re watching to see if we continue to see an extension in bearish breadth,” said Andrew Thrasher, the firm’s founder. “If we see new lows extended, that will put downward pressure on the index.”

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

Historically, the index has returned -3.56% in September when it is below its 200-day moving average, as in 2022, in a year with US midterm elections, according to BofA Global Research. The index is up about 1% since the month.

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

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

The index already broke the neckline earlier this year, a so-called head and shoulders formation, which was a bearish development. A break below the recent low of 10,500 could open the Nasdaq to 8,800, ICAP analyst Brian LaRose said. The index closed at 11,862 on Thursday.

Of course, technicians can make or break markets, and investors can adjust expectations based on factors such as the trajectory of bond yields, which are driven by monetary policy expectations and closely track the performance of stocks this year.

The yield on the benchmark 10-year Treasury peaked at about 3.5% on June 14, before the S&P 500 bottomed out.

While stocks rallied again as yields eased over the summer, the recent bounce has been accompanied by a slide in stocks this month, with the 10-year yield now at its highest level since June 16.

Meanwhile, real yields, which strip out inflation and are seen as the main driver of the risk asset, were near their highest level since 2019 at 0.88% earlier this week.

Mark Newton, technical strategist at Fundstrat, said the earnings “have huge implications for what’s going to happen over the next few months.” “In my view, productivity is very close to peaking and should start rolling.”

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

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