The Market’s Character: “Tell Me Something I DON’T Know”
Recap: Last week we stated: “It is likely that we get a countertrend bounce here. A likely target is the 10-day moving average at $404 or the 20-day moving average at $407. After a bounce, it’s possible for the market to drop for a second leg down.” SPY closed on Friday at $404.11. This is a testament to the predictive power of the combination of cycles, technical analysis, and macro analysis.
Macro Narrative: “Tell me something I DON’T Know” can sum up the market’s mindset last week. After a 6.21% drop from the February high, the market rebounded 3.05% last Thursday and Friday. Yes, we know that the Hawkish Fed policy could compress valuations. Yes, we know that higher interest rates could lead to economic pain in the future. But the market has known this same narrative for over a year. It’s old news. It seems like the market is trying to look past the well-known macro gloom and find areas to be excited about. This could be displayed in breadth, as individual stocks in uptrends are rebounding strongly. The percentage of stocks above the 50-day and 200-day moving average for the S&P 500 and Nasdaq 100 spiked last week, a show of strength in breadth.
There was a sector rotation back into risk-on sectors, as materials, communication services, industrials, and technology led the rally. This makes a future rally more probable. The fact that defensive sectors (utilities and consumer defensives) lagged, lowers the probability of a hard correction.
The market was also bolstered by a sudden drop in the 10-year treasury rate (TNX) and the US Dollar (DXY).
Technical Analysis & Market Internals: The S&P 500 fell to the S1 Support Pivot Point, which formed a confluence zone with the 200-day moving average and bounced. The rally could run up to the 20-day moving average at $405 and find resistance. It could also pause there to digest that level and then continue up to the R1 Resistance Pivot Point at $412. Given the strong breadth, it is likely that the $412 level is reached.
The Net Highs/Lows breadth indicator shows strength as a number of new stocks are rising to new highs. The Advance/Decline Line also confirms that breadth is ticking up. The Advance/Decline Volume Line shows that there was significant volume behind last week’s rally. The VIX fell back down to 18.48. Strong breadth, improving volume, and declining volatility are all positive signs for the market.
Oscillation Cycle: The Oscillation Cycle shows a current counter-trend rally in what is still a larger downtrend. With the CCI indicator not hitting the oversold level and the TRIX indicator not making a bullish crossover yet, more downside is possible to complete a 40-trading day cycle. It’s been only 17 trading days into this down-cycle. If the market can show significant strength, it is possible that the cycle would be only a 20-trading day cycle. This is where its important to keep an open mind, as the market can do whatever it wants The 10-day moving average of the NYSE Advance/Decline Line ($NYAD) is curling up, but never hit oversold levels. Similarly, the S&P 500 Bullish Percent Index ($BPSPX) is curling up but did not yet overtake the 10-day moving average.
Cycles: The Cycles Composite (blue line) forecasts a small move up, with a dip possible around 3/13 and 3/23. It forecasts a strong spring rally that could start around 4/7. The Seasonal Cycle (green line) forecasts an early near-term bottom around 3/30.
Conclusion: The continuation of a counter-trend rally up to the $412 level for SPY is possible. Expect more downside volatility around the middle of March, but get ready to buy the dip at the end of the month to benefit from a spring rally that occurs in April. For help on building a model portfolio, adding equity exposure at cycle troughs, or partaking in trend trade setups, try the Cycle Edge Premium Membership for free. Log on to cyclesedge.com and use the discount code: CYCLES.