The weight of the evidence shifted to the bears over the last few weeks. First, the major index ETFs reversed their long-term uptrends with Bollinger Band signals, our breadth models turned net negative and yield spreads widened. This report will focus on the breakdown in the S&P 500 SPDR (SPY), which represents the single most important benchmark for US stocks.
The SPY chart below shows weekly candlesticks and the 40-week SMA, equivalent to the 200-day SMA. On the top right, we can see a break below support from the January low and a break below the 40-week SMA with an outsized decline. An outsized decline is an exceptionally sharp, deep decline that can derail an uptrend. As of Thursday’s close, SPY had fallen over 9% in 15 trading days, the largest 15 day decline since September 2022. This exceptionally strong selling pressure pushed prices below the demand line (support) and a key long-term moving average. Note that a similar break occurred in January 2022, which we covered in a report and video on Friday.
Large-caps are also starting to lag the broader market. The middle window shows the SPY/RSP ratio breaking below its 40-week SMA for the first time since early March 2023. After outperforming for two years, large-caps (SPY) are underperforming the average stock in the S&P 500 (RSP). SPY also started underperforming RSP in January 2022, which is when the 2022 bear market started.
So now what? SPY became short-term oversold this week and ripe for a bounce. The broken support zone and underside of the 40-week SMA turn into the first resistance levels to watch (blue shading). We are now trading under a bear market regime so I would expect any bounce to fail in the 580 area.
Our reports and videos covered the following this week:
Six of the nine breadth-model indicators triggered bearish signals.
Yield spreads widened as stress increased in the credit markets.
Six major index ETFs triggered bearish Bollinger Band breaks.
Precious and industrial metals ETFs extended on breakouts.
Applying lessons from the 2022 bear market to the current situation.
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