Stocks experienced a downturn last week, leading to fears of a correction among investors and traders. Concerns were further heightened by a missile and drone attack by Iran on Israel over the weekend. Bitcoin also saw a significant slide of 7.7% on Saturday, marking its largest drop since 2023. Analysis of the advance/decline data at the end of March indicated a higher market risk on the long side for the S&P 500, as it had exceeded its monthly starc+ band in both February and March.
Starc bands, developed by Manning Stoller in the mid-1980s, are favorite banding or channel techniques that provide insights into market trends. These bands are constructed to contain roughly 92% of price action, with prices near the bands signaling extreme highs or lows. The monthly starc+ band for March for the S&P 500 projected a range of 5160, with the index reaching a high of 5264 in March 2024. Exceeding the monthly starc+ or starc- bands is rare and has historically indicated market extremes.
The decline in the S&P 500 in early 2020 reversed bullish sentiment, causing a drop in the bullish percentage reading by the American Association of Individual Investors. A key reversal on April 4th this year, in response to comments from a Fed Governor regarding rate cuts, raised concerns about a potential market correction. Small-cap stocks were hit hardest last week, with the iShares Russell 2000 dropping 2.8%, slightly more than the Dow Jones Transportation Average. The Dow Jones Industrials are now just barely higher year-to-date, while the SPDR Gold Shares posted a 0.8% gain.
The Spyder Trust (SPY) fell below a key reversal low from April 5th, signaling further downside potential. Daily advance/decline lines turned negative, with support levels at various moving averages and line points. The Invesco QQQ Trust managed to hold above a reversal low, with stronger support levels at lower price points. The relative performance of tech stocks like QQQ has been fluctuating, with the RS indicator potentially signaling a shift in market leadership.
Analysis of New High and New Low data, as well as the VIX and VXN indicators, suggest a potential correction in the market. The New Lows for the Nasdaq Composite are nearing a negative signal, with a rising number of stocks making New Lows indicating further downside. The type of correction expected remains uncertain, but a sharp but brief correction may be more likely if bearish sentiment continues to intensify quickly. The market will continue to be monitored closely for potential buying opportunities and market shifts.
