Chart Advisor: Another Day for the Bears – Stocks continue to slide following the latest payrolls report.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Friday, 7th October, 2022

1/ Building Up Energy

2/ Higher Lows for High Yield

3/ Will the Averages Confirm the Trend?

4/ Positioning Over Sentiment

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1/ Building Up Energy

Few assets were spared from today’s selloff, as even energy stocks turned lower into the close. Despite the broad selloff, energy booked its best week since November 2020. Perhaps unsurprisingly, this is when the rally in energy kicked off nearly two years ago.

Source: All Star Charts, with data provided by Optuma

Short-term momentum thrusts like these tend to occur at the early stages of a new uptrend. After trading sideways and digesting gains since the early summer, the recent price action suggests energy stocks could be in for a fresh leg higher. As long as XLE is above 78, the risk could be to the upside.

2/ Higher Lows for High Yield

We’re seeing plenty of bullish divergences as we scroll through our charts.

One that has caught our attention is the higher low in the ratio of the High Yield Corporate Bond ETF (HYG) and the iShares Treasury Bond ETF (IEI), as the S&P 500 printed fresh lows.

Source: All Star Charts, with data provided by Optuma

The bullish divergence from this critical risk ratio was a poignant sign that investors are still reaching for risk. Stocks confirmed this price action by rallying to kick off the week.

It also suggests the U.S. bond market is not under stress as it relates to credit spreads. We’ll continue to monitor high yield bonds and the HYG/IEI ratio for signs of deterioration. If stocks continue to move lower next week, we’ll be watching this ratio for confirmation.

3/ Will the Averages Confirm the Trend?

One of our favorite tenets of the Dow Theory is the concept of confirmation, or the idea that the indexes should confirm each other.

The chart below shows the Dow Jones Industrial Average (DJIA), Dow Jones Transportation Average (DJTA), and the PHLX Semiconductor Index (SOX), all printing new lows in tandem last week.

Source: All Star Charts, with data provided by Optuma

These indexes are an excellent gauge of overall market health and can offer valuable information regarding the near-term trajectory of stocks. While transports were the lifeblood of the economy in the past, semiconductors have taken over that role in recent decades. For this reason, we like to consider both indexes.

Based on the weight of the evidence, this could be strong confirmation for the primary downtrend in stocks. If the selling pressure persists into next week, we’ll be examining all three of these charts for new lows.

4/ Positioning Over Sentiment

Consumer sentiment has been pessimistic for the better part of a year. Despite this, we have yet to see the major indexes confirm any of the extreme readings despite the ongoing selloff in stocks.

One of the most interesting things about current sentiment data is the dislocation with positioning. The chart below illustrates this:

Source: All Star Charts, with data provided by Optuma

The University of Michigan’s Consumer Sentiment Index (MCSI) notched a new all-time low in June, with consumer pessimism exceeding that of the 2008 Financial Crisis. However, exposure to equities is still in a range that is more prevalent during bull markets, rather than bear markets.

Until we see investors capitulate with their actions in the market, rather than just their words, it could be difficult to confirm that the bottom is in.

Originally posted 7th October, 2022

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