Break out in stocks or new moon reversal back into the range?
The Nasdaq 100 has climbed back up towards its previous high, and so is adding to the moment with the prospect of a double top or bull resumption. Namo is overbought, which could be a constraint on further upside in the near term.
Breadth and volume are more bearish than bullish:
There is renewed momentum in small caps, biotech and consumer discretionary, which is bullish, but we continue to see money flows into treasuries, out of high yield and recently out of other cyclical sectors.
Treasuries have been outperforming the SP500 all year, and despite new highs in that stock index yesterday, bonds still rallied. The money flows into defensives would rather fit with a stock market in decline, so who has got it wrong?
Either the short interest and money parked in cash, bonds and defensives provides the fuel for another leg higher, or the stock market is overdue an imminent correction. The stats show that large speculators are short, that smart money flows have negatively diverged and that a significant degree of the buying is by companies purchasing their own shares. But unless the market is swiftly pulled back into the range here, then short covering could propel it higher.
The Dax made new highs, but has the same weakness in breadth as the US indices. The contrast in volume to price in the SP500 is shown here as the prelude to a correction, historically:
Source: J Lyons
Gold broke down yesterday as stocks broke up, which is more supportive of equities mustering a rally here. The two commodity indices are also charted below and show a loss of momentum the last 3 months:
If stocks can break out here, then it’s going to sting. But all those bearish indicators remain in place, and we would likely be looking at a final overthrow move. As one example, in 1987, sentiment hit similar extreme readings around Feb/March time and price range-traded until May before an overthrow rally to a final market peak in August. But let’s first see how price behaves as we pass through today’s new moon, as internals are weak and a true breakout may again prove beyond reach.