Chop Gives Way to Concern
This market is proof that there's nothing like price to change sentiment. While the chop-fest continues, a drop in the small-caps draws concern.
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How quickly the narrative changes. A few short weeks ago when interest rates were at 4.65% on the Ten Year we heard ‘higher for longer’. Now that rates have scooted back down to 4.33% we hear ‘slowdown’.
I wish I knew what all of this means for the economy but I don’t. I do know that interest rates have been rising all year. Just look at the chart of yields and you can see that right after the calendar turned to 2024 rates bottomed around 3.8% and today they are at 4.33%.
Unless and until this chart breaks under 4.20% (lower uptrend line) we’re just seeing a lot of sloshing about. And a lot of fussing over moves that are 25-50 bps. The big picture is rates have been rising all year and they began backing off in early May but remain in a wide trading range.
Maybe that’s why the RSP (S&P Equal weight) is trading in the same place it was in mid March. It too is in a wide range, a triangle. That triangle is narrowing as we get further into the apex. The textbooks say that a chart that breaks out of a triangle somewhere between halfway into the apex and three quarters of the way is the best breakout. Anything more than that is more than likely to be a listless breakout. I’d say we’ve probably just passed the half-way mark.
As far as the indicators are concerned, the McClellan Summation Index continues downward, having turned down in mid May. The Hi-Lo Indicator has backed off and continues downward but Nasdaq’s is already at .50.
Breadth, as poor as it has been, has not yet made a lower low. And for now the number of stocks making new lows has stopped expanding.
The Transports rallied but are now in giveback mode. The Utes have rallied but they have not kept up with the bonds. I will have to wait and see how the Utes develop in the next few weeks so see if this latest whoosh down was a shakeout or something more.
The only changes worth noting in Tuesday’s chop-fest was that the small caps IWM broke that uptrend line, only by a smidge though. Maybe if I used a Sharpie it would not have. There is a tiny little gap below at around 200. Filling that should lead to a short term rally. Gapping under that would be bearish.
But I can tell you that the action in the small caps this week seems to have finally drawn some concern. The ISE call/put ratio dipped under 1.0 for the first time since April 17th. And volume on Nasdaq is back to April levels now. I guess a chop-fest will do that.
