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, which is 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 and deep decline that can derail an uptrend. As of Thursday’s close, SPY had fallen over 9% in 15 trading days, which was 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 trading under a bear market regime now 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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