We've been looking for breadth and momentum divergences to be confirmed both in the U.S. and globally to mark the start of "the bottom" in equities as an asset class, so today I want to highlight the breadth of one sector that provides perspective on the current market environment.
At the October low of the S&P 500's largest component, technology, the sector saw the percentage of components at new 52-week lows expand to 17%, nearly the level at which it peaked at during the 2015-2016 correction. This signaled to us that the breadth of this sector was far worse than in Q1, despite prices being nowhere near their Q1 lows. The chart below shows the percentage of new 52-week lows in the Technology Select Sector SPDR ETF (XLK).
Additionally, the number of stocks hitting oversold conditions exceeded its peak from 2015, reaching 75% in mid-October. Strong stocks do not get oversold, so while we saw a divergence in late October lead to a (failed) bounce, a lot of damage has been done underneath the surface.
The Bottom Line
Massive spikes in new 52-week lows and stocks hitting oversold conditions can lead to a relief rally, but more importantly, they're a sign of a broken market. Prices can bounce off their lows, but that doesn't mean that the technical damage done to the trend has been reversed. History suggests that we most likely need to see a retest, or overshoot, of the lows and significant breadth improvements to signal that the market has begun the process of repairing itself through time.
For now, our initial downside targets are the October and Q1 lows, where we'll be looking for these breadth divergences to emerge and indicate that the market is showing some signs of life. Another option for the market is to correct through time at these higher levels, but we're not seeing evidence of that at the moment. If that's going to occur, the former market leaders like technology and financials need to reclaim their broken support levels and base as their components repair themselves.
Lastly, it's important to remember that this is not just a U.S. story. The same breadth and momentum divergences we're watching for in the U.S. also need to be confirmed internationally if equities as an asset class are going to get back on their feet.
Thanks for reading, and let us know your thoughts!