Written by Jim Welsh
Macro Tides Weekly Technical Review Special Update 21 August 2020
The Headline and Subsurface Weakness
The August 22 headline may proclaim that the S&P 500 reached a new all time on August 21 but a look below the surface shows deterioration.
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The chart below is a 15 minute graph of the S&P 500 and the purple line is the 15 minute Advance/ Decline line (A-D line). The A-D line is calculated by subtracting the number of advancing stocks from stocks falling on the NYSE.
After dropping to a low of 3355 on August 20, the S&P 500 rallied into a new intra-day high of 3399.96 and closing high of 3397 on August 21.
In a healthy market the majority of stocks go up when the S&P 500 trends higher. Rather than rising after the S&P 500 bottomed on August 8 at 3355, the Advance – Decline line went down decisively and continuously, even as the S&P 500 rose to 3999.
As the FAMANG stocks were bid higher the majority of stocks were overwhelmed by selling pressure. The increase in selling pressure is being masked by the strength in the S&P 500 and especially the Nasdaq 100. For the majority of investors this pronounced below the surface weakness goes unseen unless technical analysis is used to unmask it. But only if one is crazy enough to use a 15 minute Advance – Decline line! The vast majority of investors aren’t aware of this weakness.
Ironically, short term the broad market is getting modestly oversold so if the FAMANG stocks experience a bit of weakness early next week a bounce in the broad market may follow. Irrespective of short term gyrations the market is displaying a lot of internal weakness and is thus vulnerable to any negative news that elicits more selling pressure in the broad market and specifically in the FAMANG stocks.
The key point is that the broad market is weak so the risk of a 7% to 10% correction is rising, rather than a 4% to 7% set back. As noted in the August 17 WTR:
“If the S&P 500 pushes above 3350 or sets a new high, the resistance formed near the June 8 high of 3200 will become critical support. The next level of support is 2950 – 3000 which could be tested if the expectation of a 7% to 10% correction after Labor Day materializes.”
The risk-reward of a possible upside move of 2% compared to a downside surprise of 7% or more is not in investors’ favor.
See also my note from the early am Wednesday, New Highs, Narrow Market.
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