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Do stock market trends depend on macro factors?

The SPX Index is down 21.95% yearly. Investors want to know if the current oversold rally is another dead cat bounce or is a sustainable intermediate-term recovery.

The stock market depends on numerous factors, including market internals, sentiments, flows, liquidity, geopolitical, macro, and others. The macro factors may play influential roles in the longer-term trends of stocks.

Four macro indicators are the High Yield Bonds (JNK), US Treasury yields (TYX, TNX, FVX, etc.), S&P 500 Implied Volatility (VIX Index), and the CRB Index (CRB).

High-yield bonds are overly sensitive to changes in interest rates and risk aversion. US Treasury yields reflect economic conditions and investment sentiments. Commodities prices via CRB Index are a proxy for inflation rate and inflationary pressure. The VIX Index is an excellent fear indicator that measures the implied volatility of the SPX Index over thirty days.

Below are analyses of each of the four macro indicators. Focus on the longer-term implications of these indicators to uncover the sustainability of the structural trends of the SPX Index.

High Yield Bonds – Junk bonds remain one of the highest beta and risk assets within the fixed-income market since they are sensitive to changes in interest rates and a gauge of investors' risk aversion. When JNK is rallying, this shows investors' confidence in taking a risk in the market and the economy. However, when investors lose confidence and seek safety, they will avoid junk bonds resulting in a decline.

Is the 10/13/22 low of 86.28 a potential significant bottom as it coincides closely with the confluence of technical indications, including the Feb 2020 breakout (87.83), Jun 2020/2022 lows (89.01/87.99), 4/20/20 gap-up (83.87), and the 61.8% retracement from Mar 2020-Dec 2021 rally? Since the primary trend from Dec 2021 peak is a downtrend, it would imply further technical work is needed to signal a sustainable recovery to initial resistance at 91-91.5 (50-day ma and May 2022 low) and above this 94.5-95 (Dec 2021 downtrend and 200-day ma), and 96.5-97 (Mar 2020 and May/Aug 2022 highs). Above 97 confirms an intermediate-term breakout and reversal of the Dec 2021 downtrend.

Extreme JNK volume occurred on 6/13/22 or above the prior Jun 2020 volume high. Was this a capitulation or selling climax phase in JNK? MACD price momentum indicator may be rebounding from pivotal support. Does this imply selling pressure stabilizing? RSI overbought/oversold indicator nears neutral level (50). Will a breakout signal a recovery toward oversold levels (70)?

US Treasury yields – It is uncanny that US Treasuries and the direction of interest rates have accurately predicted adverse economic conditions or risk aversion and economic expansion and risk-taking market scenarios. When the US yield curve contracts sharply lower, this triggers a US economic contraction (recession) or credit/financial crisis. As soon as the US yield curve stabilizes, returning to normal, this led to economic recovery and a stock market (SPX) rally. Interest rates have been rising for the past 2-years. Will the 10-year Treasury yield (TNX - 4.01%) peak at 4.25-4.50%, or will it need to rally to 6.25-6.5% before peaking. When rates finally top, will this lead to the next economic expansion cycle and the next stock market bull?

VIX Index – The fear indicator measures implied market volatility over the next thirty days. Above the mid-30s to upper-30s and the low-40s or Oct 1997, Aug 2007, Jan 2008, Dec 2018, Oct 2002, and Jan 2022 highs confirm a breakout, opening the door for escalating fear and a stock market selloff. Return to the low-to-mid-20s signals less fear, prompting another stock market rally, at least a near-to-medium term. Below 13-15 reaffirms the structural bull trend in stocks.


The monthly line chart shows SPX violating the support at 3,800, corresponding to the top of its 2009 uptrend channel. The breakdown has weakened the structural uptrend. However, the bottom of the uptrend channel is still rising near 3,200. Until this pivotal structural support breakdown, the structural trend from the 2009 market bottom remains an uptrend. Nonetheless, SPX needs to establish a sequence of higher lows and higher highs like the Dec 2018/Mar 2020 higher-lows (monthly closes at 2,506.85 and 2,584.59) to solidify the bottom and resumption structural bull trend.

CRB Index – CRB has soared from a low of 101.48 on 4/21/20 to a recent high of 329.59 (6/9/22). It is unlike the temporary inflationary spikes from Nov 2001-Jul 2008 and Mar 2009-Apr 2011 timeframes. The surge above 218-220, coinciding with the top of the long-term secular downtrend channels, hints at a commodities super cycle. Commodity's super-cycle would also imply a transition toward a stagflation economic cycle, which would be challenging for stocks and bonds. However, if this is only temporary inflation and not hyperinflation, this bodes well for the resumption of structural bull trends in stocks and bonds.

Nonetheless, CRB has broken above another resistance zone at 313/321.5-326 (2012/2014 highs), suggesting the next rally to 331.62-338 (key 61.8% retracement from 2008-2020 decline, Nov 1980 high, and the Apr 2022 breakout target) and above this 366-371 (2006/2011 highs), and 473.97 (Jul 2008 all-time high).


However, the recent failure at 329.59 (6/10/22), coupled with violations of 283-287 (50-day ma, 200-day ma, and 10-mo ma), and the rolling over of the two daily moving averages warn of consolidation. Initial support is 241-242.5 (Jan 2022 breakout and the 38.2% retracement from May 2020-Apr 2022 rally). Below this to 215-221 (structural downtrend channel breakout, 50% retracement, Dec 2021 low, 30-mo ma, and the Sept 2021 breakout) and 183-188 (61.8% retracement and Feb 2021 break out).


Source: Chart courtesy of StockCharts.com


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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