Bonds Toy with Secular Bear Market — Was That the Top in Housing Stocks? Maybe Yes, Maybe No.

The market’s worsening breadth and the lack of a robust bounce on 8/18/23, even as bond yields reversed course after their runaway freight train climb during the week, is worrisome.

On the other hand, the market’s sentiment is souring rapidly, and oversold gauges are closing in on traditional bounce territory. Consider this:

  • CBOE Put/Call Ratio hit 1.25 on 8/16 – the highest reading in eight months;
  • The CNN Greed Fear Index hit 46 (neutral) on 8/18/23 – a month ago it was at 83 (extreme greed). Readings below 40 signal excessive greed in the market;
  • RSI for the S&P 500 (SPX) is at 34, just shy of the critical 30 oversold reading; and 
  • The New York Stock Exchange Advance Decline line (NYAD, see below) closed outside its lower Bollinger Band for the fourth straight day – this is as oversold as it gets.

Thus, with rising pessimism and with the market nearing an oversold level, the key to what happens next depends on what type of bounce we see in the next few days. If there is no real strength in the bounce, we may see a renewal of the downtrend.

Bonds Test Secular Bear Market Boundaries

The U.S. Ten Year Note yield (TNX) recently tested the 4.30% yield area, its highest point since late 2022, before turning lower. If TNX breaches this key chart point, bonds may have entered a secular bear market. That won’t be good for stocks.

The long-term chart for TNX shows that yields crossed a meaningful high point (3.25%) area in 2019 before re-entering a bullish phase, due to the pandemic raising the specter of a global depression.

Of course, history has shown that no such thing happened as global central banks hit the digital printing presses.

The U.S. recovered. The jury is still out for Europe. China remained closed too long. Foreign companies moved. Since China’s economy depends on foreign capital to fuel its manufacturing base, the exit of foreign companies resulted in a capital vacuum which is now affecting the Chinese property sector, as seen in the recent bankruptcy of the Evergrande Real Estate conglomerate, China’s largest developer.

Normally, this would be bullish news for U.S. Treasuries. Is this time different?

So Why are Bond Yields Rising?

The pandemic reversed globalization, as lockdowns had unintended consequences. Consider the following:

  • Companies moved out of China, taking capital out of the Chinese economy;
  • Construction of manufacturing plants and warehouses in the U.S. has increased; while
  • Supply chains have not fully adjusted.

New factories built in the U.S. are technology-focused: semiconductors, solar power technology, and electric car parts and batteries. A few factories make building materials, household appliances, furniture, cell phones, or internal combustion engine automobiles.

Ignored are food processing, medical product manufacturing, and other important areas. Normally, these items come from China. But China’s economy is slowing, and capital flight is making operations there difficult for both domestic and foreign companies, creating shortages of everyday products and raising prices. 

In the U.S., the skilled labor pool has shrunk. There aren’t enough people farming, making furniture, or processing meat. Those with those skills cost more. Meanwhile, companies looking to build factories in the U.S. are having trouble finding enough skilled construction workers, adding to rising costs and fueling inflation.

The U.S. government continues to pump money into the clean energy economy, flooding the economy with money just as the Fed is trying to tighten conditions. Too many dollars chasing too few goods – the most basic definition of inflation. Capital allocation is unbalanced and inefficient, compounding the problem. Thus, bond traders fear a squeeze in raw materials and skilled labor costs, and the related decreased production of necessary household goods.

In other words, the post-pandemic period is turning into one where inflation is becoming structural. If TNX moves above 4.3%, this notion will be all but confirmed.

Smart Money Update: Was that the Top in Housing Stocks?

We may have seen the top in the housing stocks, although the jury is still out on this. I’ve been bullish on homebuilders for quite a long time, but, unless something improves quickly, the best days for this group may be behind us.

The SPDR S&P Homebuilder crashed and burned on 8/17/23, slicing through its 50-day moving average like butter. Moreover, there was no real bounce to speak of on the next day, which is what’s usually happened in the past twelve months after heavy bouts of selling. Accumulation/Distribution (ADI) and On Balance Volume (OBV) both rolled over aggressively, both negative signs suggesting money is moving out in a hurry.

The key is if and how the sector bounces back. Still, the supply shortages in the housing market will resurface as the kindling required to reignite a rally in XHB. Meanwhile, money is decidedly finding a home in the energy sector, specifically in oil and oil service stocks (OIH).

Patient investors may eventually benefit from the uranium market, as nuclear power continues to slowly become a viable alternative in the search for clean energy sources in the face of the cuts in oil and natural gas production, as displayed in the accelerating downward path of the weekly oil rig count. There are now 136 fewer active rigs in the U.S. compared to the same period in 2022.

A sector, which is bullishly being ignored by many traders, is uranium. But the shares of the Global X Uranium ETF (URA) are under steady accumulation. I recently discussed how to spot the smart money’s footprints and how to turn them into profits. URA, in which I own shares, is featured in the video. You can get the full details here.

Do you own homebuilder stocks? What should you do with your energy holdings? Get answers at Joe Duarte in the Money You can have a look at my latest recommendations FREE with a two-week trial subscription. And for an in-depth review of the current situation in the oil market, homebuilders and REITS, click here.

Will NYAD Finally Bounce? NDX and SPX Approach Oversold Levels

Given the drubbing stocks took last week and the oversold reading on RSI for the New York Stock Exchange Advance Decline line, you’d think we’d get a bigger bounce when bond yields turned lower on Friday. No such thing happened. That’s worrisome.

The long term trend for stocks remains up, but the short- and intermediate-term trends are in question, as NYAD remained below its 20-day and 50-day moving averages and may still be headed for a test of its 50-day, and perhaps the 200-day, moving average.

The Nasdaq 100 Index (NDX) is very oversold after breaking below its 50-day moving average the 15,000 level. Accumulation/Distribution (ADI) and On Balance Volume (OBV), remain weak, as short sellers are active and sellers are overtaking buyers. Let’s see what type of bounce we get.

The S&P 500 (SPX) looks just as bad, remaining below 4500, its 20-day and its 50-day moving averages. Both ADI and OBV are negative. Support is now around the 4300 area.

VIX Remains Below 20

VIX rolled over at the end of last week without taking out the 20 level. This is good news. A move above 20 would be very negative as it would signal that the big money is finally throwing in the towel on the uptrend. 

When the VIX rises, stocks tend to fall, as rising put volume is a sign that market makers are selling stock index futures to hedge their put sales to the public. A fall in VIX is bullish, as it means less put option buying, and it eventually leads to call buying, which causes market makers to hedge by buying stock index futures. This raises the odds of higher stock prices.

Liquidity Remains Stable

Liquidity is stable, but may not remain so for long if the current fall in stock prices accelerates. The Secured Overnight Financing Rate (SOFR), which recently replaced the Eurodollar Index (XED) but is an approximate sign of the market’s liquidity, just broke to a new high in response to the Fed’s move. A move below 5.0 would be more bullish. A move above 5.5% would signal that monetary conditions are tightening beyond the Fed’s intentions. That would be very bearish.

To get the latest information on options trading, check out Options Trading for Dummies, now in its 4th Edition—Get Your Copy Now! Now also available in Audible audiobook format!

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Good news! I’ve made my NYAD-Complexity – Chaos chart (featured on my YD5 videos) and a few other favorites public. You can find them here.

Joe Duarte

In The Money Options

Joe Duarte is a former money manager, an active trader, and a widely recognized independent stock market analyst since 1987. He is author of eight investment books, including the best-selling Trading Options for Dummies, rated a TOP Options Book for 2018 by and now in its third edition, plus The Everything Investing in Your 20s and 30s Book and six other trading books.

The Everything Investing in Your 20s and 30s Book is available at Amazon and Barnes and Noble. It has also been recommended as a Washington Post Color of Money Book of the Month.

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Ending The Sloppy Choppy Phase

In the last two weeks, I’ve heard this market described as “frustratingly neutral”, “decidedly sideways”, “stuck”, and my personal favorite, the “sloppy choppy” phase. So how does the market breakout of this sideways period and move into a new bullish or bearish phase?

It starts with the S&P 500 and Nasdaq Composite and what I call the New Dow Theory.

What a Breakout Could Look Like

Now, there are more sophisticated methods for gauging Dow Theory signals, but I tend to keep things super simple. When both the S&P 500 and Nasdaq Composite are making a new swing high, that is a confirmed bullish signal. When either index makes a new swing high, and the other index does not confirm that new swing high, that is a bearish non-confirmation. When both the S&P 500 and Nasdaq Composite are making a new swing low, there’s a confirmed bearish signal. When either index makes a new swing low, and the other index does not confirm that new swing high, that is a bullish non-confirmation.

We can see that this week the Nasdaq Composite did indeed make a high for 2023, finally pushing above its February peak. The S&P 500, even with a fierce rally into Friday’s close, still has not broken out to a new swing high.

If the S&P 500 would close above 4200 at some point next week, that would create what we listed above as a confirmed bullish signal. What if the SPX does not close above 4200? Then we would have a bearish non-confirmation and a likely retest of the March low.

Further Confirmation From Market Breadth

Now the issue with our growth-oriented, cap-weighted benchmarks is that they are very skewed to a relatively small number of mega cap stocks in sectors like technology and communication services.

We’ve been talking narrow leadership and questionable breadth conditions for a while now, and John Murphy included it as a key bullet point in his recent market note.

If we check out the advance-decline lines by cap tiers, you’ll notice a huge difference between conditions for the largest vs. the smallest names in the equity space.

Below the S&P 500 price trend, you’ll see three data series which represent the cumulative advance-decline lines for large caps, mid caps, and small caps. Note how the large cap A-D line is testing its February high, similar to the S&P 500 itself. The mid cap A-D line is well off its February high, and just broke below its 50-day moving average this week. At the bottom, you’ll see that the small cap advance-decline line is testing its March low.

Talk about three very different takes on market breadth!

While our mega-cap dominated benchmarks can and do move higher based on the strength of the mega cap trade, the weakness in the smaller stocks out there suggests less of a “risk-on” environment, and more of a “getting large and defensive” feel.

The bear case from here would start with the small cap A-D line making a new low for 2023, as well as the large cap breadth line not pushing above its February high.

Investor Sentiment and Economic Growth

Our final chart today addresses the relationship between the equity markets and other asset classes. Here we see the S&P 500 at the top, followed by three key ratios that provide fascinating insights into market sentiment and economic outlooks.

The first ratio is stocks vs. bonds, using the SPY and TLT ETFs. Note how this ratio was in a clear uptrend for about three years, starting just after the 2020 market low. It definitely paid to own stocks over bonds from 2020 through 2022.

Now look at the last six months, and you’ll see how stocks and bonds have been pretty much a wash since October of last year. That’s right, owning stocks or bonds would given you pretty similar returns, even with equities rallying strongly off their October lows.

The next panel down shows stocks vs. gold, or what I think of as “paper vs. rocks”. Now in the rocks-scissors-paper challenge I often find myself in with my seven-year-old son, paper covers rocks. But in the financial markets in 2023, rocks have done much better due to the strength in gold and precious metals. So you’ve been much better off owning gold over stocks or bonds since the end of 2021.

At the bottom, we have two ETFs of which you may be a bit less familiar. Here, we’re comparing base metals (DBB) vs. precious metals (DBP). When economies are growing, you need lots of copper and aluminum and other practical materials to build cities and other things. When the economy is weaker, precious metals tend to thrive, as they are considered a good store of value and tend to be as recession-proof as anything can be. And, of course, weaker economies mean less demand for base metals.

So what does it mean that this ratio has been trending lower over the last 12 months? It certainly does not mean that the economy is doing well, and arguably it indicates that the actions taken by the Fed to raise rates and slow the economy has had its intended effect.

Can stocks move higher while this ratio goes lower? Of course. But just as we’ve discussed regarding small-cap stock performance and offensive vs. defensive sectors, I’d feel much better about upside potential if ratios like this were trending higher rather than lower!

Want to digest that last chart in video format? Just head over to my YouTube channel!



P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!

David Keller, CMT

Chief Market Strategist

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

David Keller

About the author:
David Keller, CMT is Chief Market Strategist at, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.

David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
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