Momentum and Sentiment Evidence – 07/21/23

Strong evidence from the dimensions of momentum and sentiment indicate an important U.S. stock market top may have been made on 07/20/23.

The Dow Jones Industrial Average (DJI) on 07/20/23 was the only one of the three main U.S. stock indices to make a new post October 2022 rally high.

The daily DJI, S&P 500 (SPX), and Nasdaq Composite (IXIC) chart courtesy of Trading View illustrates the bull move after October 2022.

When only one of the three main U.S stock indices makes a new rally high/decline low, it’s a “Rule of the majority” signal.  The trend  reversal  is revealed by the  two non- confirming indices. 

The most fascinating feature of the 07/20/23 signal is that for several months the DJI had been lagging the other indices.  Then suddenly in mid – July 2023 it becomes the leader.   This could be similar to the surge in lagging small cap stocks late in a bull market.  Typically, after several weeks of a bull phase many stocks are overextended to the upside.  This forces fund managers to look for “bargains” – stocks that haven’t moved up.

What could be happening in the 2023 rally is that not only are small caps stocks lagging, but also some large cap stocks.   If so fund managers could be doubly deluded, buying “quality bargains”.

The leading upside stock index since late April 2023 has been the IXIC, up 22% far outpacing the SPX and DJI.     

This is what happened after each index made highs in mid – July 2023.

DJI – 07/20/23 to 07/21/23 – down .53%.

SPX – 07/19/23 to 07/20/23 – down 1.08%.

IXIC -07/19/23 to 07/21/23 – down 2.9%.

The IXIC is still leading, except now it’s leading the way down.

The daily SPX and VIX chart illustrates a potential shift in sentiment.

When the SPX made its post October 2022 rally high the VIX was still above its decline low made on 06/22/23.  This is a “VIX topping” signal which has been illustrated in recent blogs on this website.  There was a “VIX topping” signal in June that lasted only 4 – trading days before becoming invalid.  The current signal has so far lasted 18 – trading days. 

A move above the VIX 07/20/23 high of 14.23 could signal another drop for the U.S. stock market. 

The bearish “Rule of the majority” and “VIX” topping” signals could be the precursor of a significant drop in U.S stocks.  On 07/26/23 the U.S. FOMC will have an interest rate announcement.