Title: Addressing Misconceptions About Corrections - It's More Than Meets the Eye
Last week, the market momentum shifted, with losses on Friday following the holiday, primarily driven by the increase in bond yields due to renewed fears of high inflation. This surge in yields was triggered by the monthly jobs report, which reported a significantly higher number of job additions than expected, leading to a decrease in the market's odds for a rate cut in March.
In early November, signs emerged that the higher yield momentum in the 10-year T-Note had peaked. The MACD-His had peaked in October and then formed a negative divergence before turning negative on November 8. The yield then declined to a low on December 6, finding support at that point. However, four days later, the MACDs turned positive once again, leading to a sharp increase in yields with a high on Friday. This put yields back above the daily starc+ band, creating an overbought reading that signals a potential pause in the rally in the coming week or two.
The correction in December saw all three A/D lines move into the corrective mode by dropping below their EMAs. This was just two days after the 10-year T-Note yield made its low and started to move higher. The A/D lines rebounded back to their declining EMAs on December 26, providing a classic selling opportunity in a correction. However, the 4 to 1 negative A/D ratio on the NYSE dropped the A/D lines below their support heading into the jobs report.
Looking ahead, support for the S&P 500 can be found at the Spyder Trust (SPY) closing just below the 20-week EMA at $581. The weekly starc- band is at $566.47, with the July high at $563.67, which is 2.8% below the Friday close. The chart also includes the Wall Street year-end S&P 500 average targets for 2023 and 2024, both of which are lower than the Friday close. The weekly S&P 500 Advance/Decline Line made a new high the week of November 29 and then closed below its WMA in the middle of December. Another lower close this week would indicate a short-term downtrend.
In terms of sector ETFs, all were lower last week led by XLRE (-4.1%) and XLK (-3%). However, XLE, XLU, XLV, and XLK were the only four sector ETFs to outperform the SPY over the past 30 days. The Health Care Select (XLV) showed notable improvement, while there was more technical weakness for the Technology Select Sector (XLK), which closed below the 20-week EMA.
Earnings season is set to begin, with several major banks reporting. Lower-than-expected inflation could trigger an oversold bounce in the market. The FedWatch Tool indicates an 80% likelihood that interest rates will remain within the current target range of 4.25%-4.5% in March, suggesting the Federal Reserve is likely to keep interest rates unchanged. However, inflation trends, labor markets, consumer spending, oil prices, and GDP expectations all point towards higher interest rates. The 10-year Treasury yield is expected to rise further, making a Fed cut to 4% questionable.
The increase in bond yields last week was primarily due to renewed fears of high inflation, as indicated by the monthly jobs report showing a higher-than-expected number of job additions. This surge in yields led to a decrease in the market's odds for a rate cut in March. Despite the correction in December, the 10-year T-Note yield, as represented by XLRE and XLK, continued to rise, with XLV showing notable improvement. According to the FedWatch Tool, there's an 80% likelihood that interest rates will remain unchanged in March, but inflation trends and other economic indicators point towards higher interest rates in the future, potentially making a Fed cut to 4% questionable.