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Technical Market Indicators
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The artificial intelligence mania accelerates.
Fundamentally, the Fed’s tight-money policy is producing high interest rates, a shrinking money supply, balance sheet losses, bank failures, restrictive lending standards, falling prices for commercial real estate, rising bankruptcies, some 100% stock-price losses, an economic slowdown, and a probable recession just ahead.
Technically, the indicators reflect accelerating strength for a few big-cap technology stocks but glaring bearish divergences for everything else. The stock market is not nearly as strong as the large-cap weighted S&P 500 and Nasdaq 100 indicate. This is a very big problem and a clear warning that the stock market is not on a firm foundation.
Sentiment for the stock market has turned more mixed, with some indicators now neutral to moderately bearish and even bullish. For most of the past 17 months, since January, 2022, there have been relatively high proportions of bears. Since the stock price lows October, 2022, unwinding of bearish sentiment resulted in a squeeze on underinvested portfolio managers and short sellers, with forced buying. Now, that source of buying demand is winding down. For practical purposes, The Art of Contrary Opinion is difficult to apply, and its actual track record does not support high confidence as a reliable component of an investment strategy.
A very few large-cap technology stocks, especially those with some claim to the recently-emerged artificial intelligence mania, are masking badly lagging performance for the broader market of stocks. History shows that wildly-popular fad stocks can turn suddenly, losing favor in an instant, and giving unwary traders little time to take defensive action before suffering large price losses. Meanwhile, even for the big-cap indexes, the market’s upside momentum is not as strong as it has been during previous upswings since the low last October, as seen by lower peaks for RSI and PPO, two of the most widely-followed short-term momentum indicators.
A market lacking solid technical and fundamental foundations can rise for a time, only to reverse suddenly to the downside.
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The S&P 500 stock price index (symbol: $SPX) is the most important and widely-followed technical indicator, against which all other indicators are compared. As the simple line chart of closing prices only shows, the S&P 500 broke out to its highest closing price since last August. RSI and Percentage Price Oscillator (PPO is an improved version of MACD, the Moving Average Convergence/Divergence Oscillator) short-term momentum indicators clearly are lagging, however. This month, as $SPX surpassed its early February peak, both RSI and PPO lagged below their peaks of mid-April and early February, signaling bearish momentum divergence. On-Balance Volume also signaled bearish divergence in mid-March when it fell to a new low, and it has been lagging ever since. And in this month of May, On-Balance Volume fell below and remains below its April lows while $SPX rose to a 9-month high, signaling a glaring bearish divergence. The $SPX price has been supported by a few big technology stocks, by demand from systematic trend following, by extreme bearish sentiment, by rebalancing of underweighted equity portfolios, and by short-covering—but now with sentiment moderating and without indicator support, the $SPX price uptrend is not on solid ground.
The S&P 500 stock price index is capitalization weighted, so the largest companies have an outsized influence on it. The Invesco S&P 500 Equal Weight ETF (RSP) corrects this bias in favor of the giants by giving the same weight to every stock in the S&P 500. Here we note a large bearish divergence since February compared to the $SPX, as RSP lagged far below its February high, confirmed by relatively weak readings for RSI, PPO, and On-Balance Volume. With the 50-day SMA now only slightly above the 200-day SMA (Simple Moving Average), a systematically bearish crossover is probable if price continues to sag lower.
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