- Cooling Off from an Overbought Condition
- Breadth Deterioration
- Giddiness in the Options Market
- Intermarket Relationships…Bond Yields Rising
It’s a great pleasure to guest-author the CMT’s Market Mosaic this week. My name is Alex Campbell - I’ve been involved in financial markets for 20 years as a portfolio manager, allocator, and strategist. I write a weekly newsletter on Substack about the Nasdaq 100 called QQQ notes, which combines technical indicators and macro analysis to provide a clear view of current market conditions. I’ll draw on this framework throughout the week. This morning, I cover a few obstacles facing QQQ that I wrote about over the weekend: an overbought condition, deteriorating breadth, signs of excessively bullish sentiment, and a potential headwind from rising bond yields.
Cooling Off from an Overbought Condition
After a straight line rally from the March 30th low, which saw QQQ rise almost 30% in 32 sessions, last week brought a pause. During the move higher, QQQ became very overbought, reaching a daily RSI of 83, and extending more than 9.4 ATRs above its 50dma and 9.8 ATRs above its 100dma. Since the current bull market began in late 2022, conditions like these have preceded periods of pullback or sideways consolidation, as shown in the chart below.
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Breadth Deterioration
Breadth was poor last week. Multiple measures of breadth are suggesting a bearish breadth divergence against the major indices. Notably, the % of stocks above their 40dma has fallen rapidly, despite new highs in the indices.
Giddiness in the Options Market
Positioning surveys show bullish but not worrisomely euphoric sentiment. Last week’s NAAIM number was 77, which is well short of the “too hot” danger zone above 100. That in turn suggests the current rally may have further room to run. However, in the short-term, the options market suggests giddiness, with the 5dma of the Put/Call ratio at around 0.6, which is close to a 12-month low. We may need to cool off a bit before we can move higher again.
Intermarket Relationships…Bond Yields Rising
Growth and technology stocks don’t like rapidly rising bond yields as they force investors to use higher discount rates, which reduce the present value of future earnings and put downward pressure on stock prices. Bond yields are rising for a number of reasons, including the energy price shock, rising inflation, and uncertainty surrounding the policy goals of new Fed Chair Kevin Warsh. The yield on the 30-year U.S. Treasury may be breaking out above 5%. Keep an eye on QQQ’s sensitivity to rising yields if the move gathers pace.
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