Paragraph 1: Setting the Stage – Market Uncertainty and Technical Indicators
The final Federal Open Market Committee (FOMC) meeting of the year dominated market attention in the last full trading week of 2023 (implied year). While recent economic reports largely aligned with inflation expectations, growing speculation about potential interest rate cuts added to the prevailing uncertainty. Prior to the election, bullish readings from advance/decline (A/D) indicators suggested a positive trajectory for stock prices. However, as stocks continued their ascent into early December, warning signs began to emerge. A significant number of daily A/D lines peaked on November 29th, subsequently initiating a decline that raised concerns about market sustainability. This shift in technical indicators hinted at a potential reversal in the upward trend, prompting investors to closely monitor market developments.
Paragraph 2: Broad Market A/D Indicators Flash Warning Signals
By December 9th, a majority of the A/D lines had turned negative, falling below their respective moving averages (MAs). This negative divergence painted a concerning picture of weakening market breadth. The sole exception was the Nasdaq 100 A/D line, which remained positive, suggesting some pockets of strength persisted within the technology sector. However, the broader market, as represented by the SPDR S&P 500 ETF Trust (SPY), remained largely unchanged, hovering above its rising 20-day and 50-day EMAs. Despite this relative stability, the underlying support levels, including the October high and November lows, became crucial points of observation for potential breakdowns. The $583-$584 area, representing the October high and November lows, and the $568-$570 area, corresponding to the late October lows, were identified as key support zones.
Paragraph 3: Deeper Dive into S&P 500 and NYSE A/D Lines
The week’s trading further exacerbated the negative divergence, as the S&P 500 A/D line breached the November lows and approached critical support. The NYSE Stocks Only A/D line followed suit, breaking below its support level with the September lows looming as the next significant support target. The NYSE All A/D line also tested its support, adding to the growing list of concerning technical breakdowns. Despite all three A/D lines having previously made new highs alongside price, the current declines suggested a potential correction within the overall positive intermediate-term trend. Any subsequent rebounds would need to decisively move above the declining EMAs to improve the short-term technical outlook.
Paragraph 4: Nasdaq 100 and Equal-Weighted ETF Analysis
The First Trust Nasdaq 100 Equal Weighted ETF (QQEW), after reaching new highs, reversed course on December 9th. Despite remaining relatively flat for the subsequent six days, holding above its 20-day EMA, this reversal signaled a potential shift in momentum within the technology sector. The Invesco QQQ Trust, Series 1 (QQQ), while exhibiting a series of higher highs, displayed characteristics of a narrow rally, with a limited number of stocks driving the gains. This concentrated strength, highlighted by a 2.6% gain within a specific period, raised concerns about the overall health of the Nasdaq 100. The presence of support levels for both QQEW and QQQ provided potential downside buffers but also represented critical levels to watch for further weakness.
Paragraph 5: Internal Market Deterioration and Percentage Analysis
A deeper examination of the market’s internal dynamics revealed further signs of deterioration. The S&P A/D % and QQQ A/D %, which measure the percentage of stocks within each index closing higher or lower each day, highlighted a concerning trend. For twelve consecutive days, a majority of S&P 500 stocks closed lower, with the negative trend accelerating. A similar pattern emerged in the Nasdaq 100, with a majority of stocks closing lower on four of the past five days. Even during a sharp market gain, a significant portion of Nasdaq 100 stocks experienced declines, confirming the weakening breadth of the rally. This analysis reinforced the view that the recent market advance was losing steam, increasing the likelihood of further weakness.
Paragraph 6: New Highs/New Lows and Risk Management
The analysis of new highs and new lows in both the NYSE Composite and the Nasdaq Composite provided further evidence of market deterioration. The prevalence of new lows over new highs signaled a shift in market sentiment and supported the expectation of further weakness, potentially following a short-term rebound. Given the accumulating technical warning signs, a cautious approach to risk management was recommended. Reducing equity exposure proactively, rather than reacting to market declines, was suggested as a prudent strategy. The 20-week EMAs of the leading market averages and ETFs were identified as potential support zones, offering potential entry points for long-term investors. This proactive risk management approach aimed to mitigate losses and capitalize on potential buying opportunities during periods of market volatility.
