Can The Bond Market Cushion The Stock Market Decline?

It was a sell-everything week for the stock market. Once again it was the commentary from Fed Chair Powell, not any action, that accelerated the selling. The prior week’s negative market reversal in reaction to the ECB comments after it hiked rates set the tone for the market last week.

That did not help investor sentiment as the bullish % from the American Association of Individual Investors declined to 31.3% while over 68% are either neutral or negative on the stock market for the next six months. AAII noted that Optimism on Stocks at a 16-week Low.

The weekly market review notes that only the Spyder Gold Trust managed a small gain of 0.2%. It was another week that the iShares Russell 2000 was the weakest down 3.8% with the Nasdaq 100 not far behind as it was 3.3% lower.

The S&P 500 was 2.9% lower followed by 2.3% declines in the Dow Jones Transportation and Dow Jones Utility Averages. In comparison, the Dow Jones Industrial Average was down 1.9%. By comparison, the market internals on the NYSE were weaker than the averages as just 674 issues were advancing and 2373 were declining. On both the NYSE and Nasdaq Composite there were more stocks making New Lows than were making New Highs.

The Spyder Trust (SPY
PY

SPY
) had its largest weekly decline since March and the crisis that hit the regional bank stocks. The close was fractionally below the QPivot at $430.44 The tentative 4^th QPivot is now at $439.95 but will not be final reading until the end of the month.

The uptrend from the October 2022 low, line b, is at $421.06 with the weekly starc- band at $419.69. This level also corresponds to the 40 week EMA at $419.64 The 20-week EMA at $435.88 is now the first resistance

The very negative A/D numbers have done some technical damage. The S&P 500 Advance/Decline line has dropped sharply below its WMA and has reached its uptrend from the October 2022 low, line c. It has also declined below the August low. This is a negative sign as the A/D line has formed a new downtrend. It does not reverse the positive signal in June when the S&P A/D line made a new all-time high. This will be important information for gauging and interpreting the next market rally.

The Invesco QQQ
QQQ
Trust (QQQ) does not look as negative from a technical standpoint. The August low at $354.19, line a, is still holding. The QQQ closed below its daily starc- band on both Thursday and Friday. The weekly starc- band is at $341.06. There is strong resistance now in the $380 area.

The Nasdaq 100 A/D line has dropped sharply below both its WMA and the support at line c but is still above the August low. If we get a very strong week or two it could reverse back above its WMA. Before that happens we should see positive signs from the daily Nasdaq 100 A/D line which is currently negative as are all of the A/D lines.

The volume over the past two weeks has not been extreme. The weekly relative performance (RS) has declined slightly below its WMA which may be an early sign that the QQQ is giving up its leadership from the start of the year. If the WMA starts to decline more steadily it will further suggest a change in leadership.

The yields on the 2-Year T-Note, 10-year T-Note and 30-Year US bond yield were all higher last week. This helped to accelerate the flow from the stock to bond markets and also to increase the fear of investors.

All of these yields have been rising for most of the year but have risen more sharply in the past few months. Let’s look at the charts. The 2-Year T-Note had a high last week of 5.314% that was well above the resistance at line a. The yield settled at 5.112%, below the breakout level near the week’s low. Though this was not as negative as a key reversal it was not a bullish close. Both the MACD lines and MACD-His are just barely positive and a drop below the 20-week EMA at 4.787% would be the first sign that a top has been completed.

The recent rally in the 10-year T-Note yield has been much stronger after it overcame the boundary of its downward trading channel, line c, in early July. This was just a few weeks after the MACDs both turned positive. The rally after the breakout still looks strong as the yields have stayed well above the rising 20-week EMA that is currently at 4.025%. The upside target from the channel has been met. A 30-point or so pullback would not be surprising as yields have moved higher for 7 of the past 9 weeks.

So what is next? The oversold readings favor an oversold rally before the end of the month and quarter. A drop in the bullish % to the 25% area could help fuel a better tally as will a decline in bond yields.

The QQQ looks considerably stronger than the SPY and a weekly close back above the tentative new QPivot at $366.87 would be a positive sign. Though the current yields look attractive I still favor stocks over bonds as we head into the end of the year but be sure to use stops and adjust them when you see signs of market weakness.