From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Considering the selling pressure in recent weeks, we were very excited to take a look at our breadth indicators today to see if we finally saw some downside expansion worth pointing out. Spoiler alert: There was nothing there.
Being as we're in a sideways market, we're always on the lookout for a change in character in internals that might suggest some resolutions are finally on the horizon. And since bears have been driving stocks lower since early this month, our focus is on new short-term lows.
With the S&P experiencing some volatility and revisiting its 50-day moving average this week, did we finally get that "fall day?"
Today, we're going to revisit both of these key themes and see where we currently stand.
Let’s check in on our percentage of new lows to see whether or not participation is expanding to the downside. This is a chart showing new 21-day (or one-month) lows for each S&P index:
With the major indexes still just a stone's throw from fresh highs, we want to analyze internals on a very short time horizon. We can't expect stocks to be making new six-month and 52-week lows with the indexes trading where they are.
Distribution is a process, and deterioration under the hood has to start with new monthly lows before it expands to more meaningful timeframes. Without new 21-day lows, how can we expect to see weakness expand over any longer timeframes?
So, what are these new short-term lows telling us? That there's absolutely nothing to see here, that's what. We're right back to the same levels we've already seen a handful of times since this summer.
And guess what? Each instance represented a dip that investors would have been rewarded to buy into. Why should this time be any different?
We don't think it will be...
Just like the downside expansions we saw in July 2021 and September 2020, this is most likely another tradable bottom whereby prices revert back in the direction of the underlying trend. And we're already seeing it these last two sessions, as stocks have rebounded aggressively.
The next theme is another snooze-fest and something we've already written about extensively: Are stocks due for a correction?
No, they're not. And why's that?
Simple: The majority of stocks have already been correcting, and many remain in corrective phases, even bear market territory.
This chart shows the percentage of stocks in the S&P 500 that are down 10%, 20%, and 30% from their 52-week highs:
As you can see, 43%--or nearly half of the S&P 500--are currently in "correction territory" as defined by the mainstream media (not us!) as 10% below their 52-week highs.
So, if you're out there waiting for a "correction" at the index level, you might be waiting for some time. If you do your homework, it's very clear that stocks have already corrected.
Can they correct further? Is it possible we see further downside price action from here? Yes, always.
But, amid all the other developments taking place in recent sessions, it's not the bet we're making. The worst stocks just dug in and held key support levels or registered failed breakdowns and fast moves higher. We're just not seeing the deterioration in price that would suggest further downside.
Instead, bulls just performed yet another "kick save--and a beauty," repairing all that damage from last week and this week... and then some.
Pattern failures have been a cornerstone of this year's sloppy market. In recent weeks, we've experienced our fair share of both potential failed breakouts and failed breakdowns.
The major difference between the two patterns is that the failed breakdowns have confirmed and are resulting in some fast moves higher right now.
Meanwhile, the failed breakouts are looking more and more like false starts, as many of them did not experience downside follow-through but instead repaired that damage in recent sessions and are now back above their key levels.
Here's an example of a failed breakdown and fast move higher in Industrials:
And here's Semiconductors as an example of a false start whereby price has already hooked higher and reclaimed its former highs from Q1:
So, breadth continues to give us nothing of significant value from an information standpoint. It's just signaling more of a mess, more chop. Pattern failures are to be expected in this environment. And we see no signs of resolution in either direction taking place any time soon.
I know it's not what most investors want to hear, but it's the truth. Stay patient. Stay disciplined. Pick your spots selectively. Manage risk before all else.
We can only go sideways for so long.
As always, we'll be keeping a close eye on internals moving forward to gauge the market's overall health. We'll be right here talking about it as soon as anything important changes.
But, for now, there's still no evidence of a “fall day,” so there's no reason for us to get cute and try to call a top here. There's also no reason for us to anticipate any further corrective activity, as the market has been correcting for the better part of 2021 already.
For now, it's just more of the same. And that's all we got this week!
