Chart Advisor: Improving Internals – Downside participation narrows, despite new lows at the index level.

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Monday, 17th October, 2022

1/ Improving Internals

2/ Bonds Lead

3/ New Lows for Growth

4/ The Pound Is on the Rebound

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1/ Improving Internals

Despite last week’s volatility, most individual stocks did not make new lows for the year, unlike the major averages.

When we analyze what is happening beneath the surface, most individual stocks are not confirming the new lows seen at the index level these past few weeks. To illustrate this point, here is the S&P 500 along with the percentage of new 63-day lows for S&P 500 constituents:

Source: All Star Charts, with data provided by Optuma

In early summer, well over half of all stocks fell to new lows as the broad market made new lows. In recent weeks, however, the reading didn’t even come close to the high-water mark from June. Not only has there been a bullish divergence since the summer, fewer stocks are falling to new year-to-date lows even as the major indexes do so.

This type of breadth improvement is constructive and does not support new lows at the index level. However, as long as the largest stocks continue to fall, the indexes could remain under pressure.

2/ Bonds Lead

First bonds, then stocks, and now commodities have rolled over, following the traditional intermarket cycle. If the pattern holds, we could expect bonds to bottom first and eventually lead the way higher.

Source: All Star Charts, with data provided by Optuma

With yields on the rise, there are no signs of this yet, but even a transition to a sideways trend could bring some stability to other asset classes.

However, if and when bonds dig in and begin to catch higher, it could mean increased downside pressure for commodities and other cyclical assets. With the long-term trend just beginning to reverse, the question now becomes how deeply commodities could correct.

3/ New Lows for Growth

While market internals are improving as fewer stocks make new lows, the largest and most important stocks in the world remain under pressure. The Vanguard Mega Cap Growth Fund (MGK) provides an excellent representation of their performance.

Source: All Star Charts, with data provided by Optuma

With MGK completing a massive topping pattern and breaking to its lowest level in over two years, it could potentially lead the major averages to the downside. Considering the overlap in the composition of these indexes, this could be a safe assumption.

As such, bulls would need to come out and repair the damage as soon as possible. If they cannot, we could anticipate a fresh leg lower.

4/ The Pound Is on the Rebound

Broad selling pressure hit the dollar today as major global currencies sprang back into life.

The pound was the most resilient, retesting its March 2020 trough as it climbed 175 pips on the day. This rebound comes just three weeks after the pound hit its lowest level on record against the greenback, at $1.03.

Source: All Star Charts, with data provided by Optuma

While the uptrend in the dollar is still intact, noise is growing in opposition. If the pound and other major currencies such as the euro experience more decisive rebounds like today, the dollar’s strength could falter.

The USD advance could begin to cool if and when the pound reclaims its former 2020 lows.

Originally posted 17th October, 2022

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