It was a rough week for stock market bulls, with the major indices slumping lower.
The carnage appears to be arriving right on time based on longer-term cycle and seasonal analysis.
Before I launch into my stock market analysis and overview, I thought I would share 5 key themes to watch into next week.
Here they are:
1) Technology has snapped lower vs the broader stock market in a rapid mean reversion reversal which kicked off last week. Additional tech weakness is likely.
2) Treasury yields might prove muted in the next 4-6 weeks, but look to be trying to bottom out and might extend rallies after October.
3) US Dollar rally might hurt emerging markets, but for now, inconclusive breakdowns in the EM space v Developed markets.
4) Market breadth has tailed off “big-time” with more than 5 occurrences in the last few weeks of more Decliners than Advancing issues.
5) Cyclical time of importance starts in September, leading stock market indices lower while implied volatility spikes- 20, 30 and 60 year cycles show above-average weakness.
Financial Markets Summary
Recent selling paves the way for further weakness into early to mid next week before any stabilization and bounce. Near-term downtrends remain intact and momentum is not oversold. S&P 500 ETF (SPY) targets lie down near 324 with a potential push down near 321 before stabilization and a bounce into expiration next week.
Specifically, Demark TD Buy Setup could be in place within 3-4 days on selling right above TDST on SPY, something that likely limits near-term selling. Furthermore, daily Ichimoku support lies directly below. Thus, while another 3-5% is possible into next week, it’s thought that this paves the way for a buying opportunity into Sept expiration and/or 9/24 before a more severe downdraft gets underway into October.
Near-term, the 10-year US Treasury Bond Yield (TNX) and US Dollar have held up in resilient fashion of late, while the Metals have pulled back. Energy in particular looks quite weak while Technology has officially broken down versus the S&P 500 and should weaken further in the days ahead. Whether or not Value can outperform Growth if Energy has a severe downdraft is tough to tell, but Financials are likely to outperform Technology and Rates very well could have an upward bias into year end (despite some churning and pressure into late October)
Overall we seem to finally have arrived at a time when volatility has returned, and it pays to either use rallies to de-risk, or trade the swings, depending on one’s risk tolerance and time horizon. Bottom line, trends suggest further weakness happens into next week, but initially should be buyable. Trends overall likely lead down into late October.
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Twitter: @MarkNewtonCMT
Author has positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
