This Chart Says the June Lows Will Not Hold
The relationship between the stock market and money market interest rates is as old as the hills. The "hills," in this case, go back to 1900 and before.
The concept rests on the idea that, at the beginning of the cycle, when the economy is falling like a stone, the Fed injects liquidity into the system to get things moving again. As soon as the stock market senses this liquidity injection will have a positive effect on business activity, it does not wait, but immediately rallies in anticipation the next recovery. That event takes place at the start of the brown shading in Figure 1, which has been flagged by the letter "S" representing a bottom in stocks. The letter "B" stands for a low in bond prices, or, more accurately, its reciprocal, a high for interest rates.
Chart 1 brings us into the real world with a comparison between the inflation-adjusted S&P Composite and the yield on 3-month commercial paper. The vertical lines intersect with the recession-associated lows in the stock market, and the small red-dashed arrows tell us that, in virtually every situation, peaks in the yield lead those of the stock market. When it does not, the yield peaks and the stock market bottoms coincidentally. Given that the Fed is expected to raise rates on at least two more occasions before the current rate hike cycle ends, it seems almost inescapable that money market rates are headed much higher.
Bearing in mind the leading role played by rates, it seems a small leap to conclude that the June low was not the bottom of the 2022-?? bear market. Also, using industrial commodities as our base, all three markets are below their 12-month moving averages, which puts us currently in that pink shaded area in Figure 1. That means that there is a likelihood further stock market losses lie ahead.
Recent Chart Action
Chart 2 shows weekly bar action for the S&P Composite, where we can see the formation of a bullish two-bar reversal earlier in the month. This should have had a favorable effect on prices, which indeed it did at last Monday's opening. However, by the end of the week, the Index had abruptly dropped below the previous week's lows, thereby forming a bearish outside bar. In doing so, it had the effect of cancelling the positive effects of the two-bar reversal. These one- and two-bar price patterns are only expected to have an effect on prices for 5-10 bars. However, it's important to remember that the outside bar in Chart 2 reflects weekly data and, as such, is expected to have a negative influence on prices for between 5-10 weeks, enough to do some serious damage, unless it too is quickly cancelled.
Chart 3 looks at the NASDAQ over the same period, but in the form of weekly candlesticks. Here, we can see that the Index has been tracing out a bearish consolidation engulfing formation over the course of the last two weeks. Although I am not showing it, the S&P did the same thing, which of course reinforces these signals. It should also be noted that, since the beginning of this year, the real bodies experienced consistent support or resistance at the blue 10-week MA. Consequently, last week's attempt to surpass the average at Monday's opening takes on some added negative significance.
Charts 4 and 5 use daily data and their message is also bearish, as three of the four averages have now broken down from consolidation head-and-shoulder formations.
The Long-Term Picture Again
Finally, we end up with a long-term chart featuring the NYSE, S&P and NASDAQ. All three crossed below their 12-month moving averages some time ago, but are now resting on mega up trendlines. What worries me is that the weak short-term technical position demonstrated by the four previous charts could easily tip over into the longer-term structure. Similar breaks occurred during the 2007-09 bear market. Of course, we will not know for sure until the end of the month because it's a monthly chart, so there is time to avoid a decisive penetration of these lines. If one does take place, though, it will increase the risk of a more serious long-term decline or multi-year trading range.
Good luck and good charting,
Martin J. Pring
The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.
