Will It Hold?
Igor Manukhov - Mar 03, 2023
As expected, market participation divergence (fewer stocks pushing the market higher) resulted in a pullback. The next question is whether the market will hold the 200 day moving average.
A month ago I wrote about spotting a divergence between the market price and the bullish percent index indicator. Basically, despite the overall advance of the market, fewer and fewer stocks have been carrying the market higher (red lines on the chart). Historically, markets change direction when divergence like this appears. This is exactly what happen in February. The market went down by about 4-5% and is now sitting just above its 200 day moving average (green line). For this rally to continue, it is imperative that this level holds. If the market does close below this green line, we could see more downside over the next few months.
Notice how high-yield spreads were declining even as the market was pulling back (orange line on the bottom). This is an encouraging sign. Lower spreads mean that the bond market is less worried. All major selloffs resulted in high yield spreads expanding (orange line going up instead of going down). This development suggests that this is likely just a minor pullback. We shall see. Keep calm and carry on.
