Slumping U.S. stock market technical indicators flash warning sign

Flags are seen outside the New York Stock Exchange (NYSE) in New York City, where markets are in turmoil after Russia continues to attack Ukraine, in New York, USA, February 24, 2022. REUTERS/Caitlin Ochs/File photo

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NEW YORK, Sept 9 (Reuters) – Indicators that investors use to gauge the health of the U.S. stock market have worsened, fueling concerns that the benchmark index could retrace its mid-2000 bear-market low. June.

The S&P 500 (.SPX) it is down 7% since mid-August after a sharp summer rally, hit by expectations the Federal Reserve will raise rates higher than expected as it struggles to cut consumer prices from 40-year highs. read more

The pullback in stocks has given more reason for caution to those who track market phenomena such as breadth, momentum and trading patterns to inform their investment decisions. While many of these indicators were showing a bullish picture just a few weeks ago, they are now showing a less bullish story, raising concerns that this year’s sell-off in markets is not over. read more

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

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

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Among the factors investors study is the breadth of the market, which shows whether a significant number of stocks are rising or falling in unison. Positive market breadth, when more stocks are advancing than declining, points to a high degree of confidence among stock bulls.

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

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

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

“We’re looking at whether we continue to see an expansion in the bearish breadth,” said Andrew Thrasher, the firm’s founder. “If we see new lows expanding, that will put downward pressure on the index.”

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

Additionally, the S&P 500 Index has been 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 the 200-day moving average during 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% so far this month.

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

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

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

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

Of course, technicals can get better or worse as markets turn and investors adjust expectations based on factors like the path of bond yields, which are driven by monetary policy expectations and have closely watched stock performance this year.

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

While stocks rallied as yields dipped over the summer, a recent rally in yields has accompanied stocks’ slide 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 a key driver of risky asset prices, stood at 0.88% earlier this week, close to their highest level since 2019. read plus

The yields have “huge implications for what could happen in the coming months,” said Mark Newton, technical strategist at Fundstrat. “My own view is that yields are very close to a peak and should start to pick up.”

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

Our standards: The Thomson Reuters Trust Principles.

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