The S&P 500 (SPX) lost 7,700 in morning trade as rising yields and oil pressed on stocks. The index broke out of a descending channel, and volatility compressed to the tightest Bollinger band reading all year.
Key levels
The level to watch is the prior gap around 7760 to 7690. Price cut into it this morning but did not fully close it. Bulls need that level to hold. Gaps that get filled within about four trading days signal exhaustion. A close below the gap near 7760 could bring more volatility and a shakeout back to prior support around 7600.
Breadth versus price
The SPX has held up well despite weak breadth. New York Stock Exchange new yearly lows spiked to their highest level all year - a striking reading, since the index sits only about 2 to 2.5% below all-time highs. That measure usually spikes during market bottoms, not near highs.
Weak breadth makes more sense set against sector trends. Technology is breaking out relative to the SPX, while staples, utilities, and other defensive groups hit new relative lows.
Tech leadership returns
The Mag 7 underperformed over the summer, then flipped to lead this week with a breakout to record highs on Monday and Tuesday, reclaiming market leadership. In early bull cycles tech tends to lead. After a short stretch of washed-out breadth, tech is stepping back in front. Technology is nearly 40% of the index, so when the leaders return after the rest of the market carried prices higher on its own, that shift can push the market a lot higher for now.
Energy and the yield link
After short-term crude oil weakness, the energy sector tested a confluence of support from prior highs and the 50-day moving average. There is no confirmed bounce yet. Traders may wait for a close above the high of the low day as confirmation before adding on weakness. Bollinger bandwidth volatility in energy has compressed to the lowest levels all year. Volatility is mean reverting and can come with a price breakout in either direction.
The rolling three-month correlation between the energy sector and the 10-year yield has hit a strong positive extreme of 0.9. Correlations at extremes tend to unwind and shift with changing market conditions. The open question is whether this tight link holds as crude oil and energy stocks test key levels.
Do energy prices and yields keep rising along with stock prices? Yes. All year yields have moved higher and so have stocks. History shows periods like this - inflationary stretches and commodity booms when energy carried a heavier weight in the index. The 2003 to 2008 commodity boom fits, as do the late 1970s and early 1980s, when inflation and commodity booms ran alongside rising stock prices. This pattern could continue this year and over the next few years, especially if the strength holds. Today the 10-year carries a five handle and Brent crude sits near $100, and stocks are hanging in.
Seasonality broke down
Seasonal patterns have been thrown out this year. Rather than cherry-picking election or midterm cycles, I compare a 50-year average to the current year's performance, since that average already folds in the shorter cycles. This year barely followed the usual path. The first few months were choppy, when history points to strength in January and February. From May through August the SPX stayed rangebound with a time-based correction, not the usual seasonal strength. August brought weakness where the market historically pushes to new highs.
So this fall likely will not follow the typical seasonal script either, and the market could rally into year end. This stretch is usually the seasonal bottoming process. Many traders had eyed September as a buying chance if a dip came.
