There Could Be More Downside Moves Ahead

Stocks have rallied for two straight days to June 15 after starting the past week on a sour note and extending losses from the previous week on fears of rising bond yields and inflation, and their impact on the direction of interest rates.

Before the rebound last Wednesday, stocks across the board had recorded major losses in four of six sessions from June 5 to June 12. During that time, the DOW lost nearly 400 points, or about 2.9%. Technology and small-cap stocks also lost favor.

What concerns the market is the rise in bond yields to a five-year high, which suggest higher interest rates in the future, thereby cutting into corporate profits as well as the disposal income for consumers. The fear is this could mean lower consumer spending and GDP growth while sending the economy into a harder landing.

Technically, sentiment indicators on the NYSE have been weak after a lengthy streak of bullish readings. You need to monitor the sentiment

The new-high/new-low ratio (NHNL) is a measure of the number of stocks touching a new 52-week high versus the number of stocks that have declined to new 52-week lows. The theory is, investors in a bullish market quickly bid up stock, and you see a rising NHNL ratio. When investors get nervous, less new highs are made and the NHNL ratio will tend to decline; thereby giving you a warning. At the other end of the spectrum, bear markets have more new lows than new highs.

There is a general guideline that we use to examine the NHNL ratio. When the ratio is above 70%, it is bullish; below 70%, it is a warning; and below 20% is bearish.

The NHNL on the NYSE is currently weak, with the last six straight sessions below the 70% bullish level. There were three sub-30% readings during this stretch. If this minor trend continues, it may signal a reversal and more downside moves.

The NHNL on the NASDAQ has also been weak, with the last six straight sessions below the 70% bullish level.

A failure of the sentiment indicators to reverse course could signal more downside moves ahead of us.