DOW TESTS RESISTANCE NEAR AUGUST HIGH -- SPX AND QQQ LAG BEHIND -- 3 MONTH - 10 YEAR YIELD CURVE INVERTS

DOW LEADS WHILE SPX AND QQQ LAG BEHIND... The fourth quarter rally in stocks may be losing some upside momentum.   That's especially true of the Dow.     Chart 1 shows the Dow Industrials approaching formidable overhead resistance at their August highs.   That may be hard to overcome.   Charts 2 and 3 show the rest of the market lagging behind the Dow.   And well within their major downtrends.  Chart 2 shows the S&P 500 still trading below its 200-day moving average (red arrow) and a major downtrend line drawn over its 2022 highs.   Chart 3 shows the Invesco QQQ Trust in an even weaker technical condition.   Those two weaker indexes may offer a more realistic view of the market as a whole.  It's also worth noting that their 9-day RSI lines are nearing overbought territory.   The main message from those three charts is that stocks are benefiting from recent good news on inflation and normal yearend seasonal strength.   But they still remain in major downtrends.   Weekly sector rankings also show a more defensive mood.

DEFENSIVE LEADERSHIP... The weekly sector ranking in Chart 4 show Consumer Staples, Utilities, and Healthcare as the week's sector leaders.   That's usually a sign that investors are turning more defensive.   In addition, economically-sensitive Consumer Discretionary stocks were the week's worst performers.    Energy stocks also had a relative soft week owing to a roughly 10% drop in the price of crude oil.   Most other commodities also lost ground.   The good news there is that lower prices may be signaling lower inflation pressures.   The bad news is that lower commodity prices often signal a more recessionary environment.  Another potential recessionary warning came from the yield curve.

ANOTHER YIELD CURVE INVERSION... Yield curve inversions take place when a short-term interest rate exceeds a longer term rate.  During the summer, the spread between the 2-year and 10-year Treasury yields fell below zero which is a traditional signal of an impending recession.   This week the spread between the three month  and 10-Year Treasury yields also fell below the zero line resulting in an inverted yield curve (red circle).   The monthly bars in Chart 5 also show that version of the yield curve falling to the lowest level since 2007.  Historically, that yield curve inversion has predicted 12 out of the last 11 recessions.   In other words, it gave only one false positive.    That's a pretty good track record and increases the odds of an economic recession.   That normally carries bad news for stocks.