Markets have been drowning in a sea of negatives in latest months. Between a torrent rise in yields, partially pushed by a runaway US deficit, a multi-month rally within the , and now a sudden geopolitical escalation danger with the brand new Israel-Hamas warfare there’s loads to be involved about.

All of those elements have now introduced recession danger again to the entrance and middle amid rising considerations that one thing might break. And it’s true one thing might at all times break. It’s not a snug interval for buyers which have seen outsized positive aspects in tech this 12 months, however valuable little else as small caps, banks equal weight and different sectors stay solidly within the pink for the 12 months.

Clearly not a heat and fuzzy market surroundings to navigate by means of.

But amid all of the negatives, there are additionally positives rising and as market technicians we control evolving market conduct, particularly at occasions of market extremes, be it to the upside or the draw back.

This week and different indices made new lows versus the sooner October lows whereas yields made new highs leading to a good quantity of concern.

One of many key sign instruments market technicians search for are indicators of divergences as they typically sign a shift in coming market developments. Within the case of market tops, they’re known as destructive divergences the place worth makes a brand new excessive however underlying alerts don’t. The polar reverse is true in case of recent market lows approaching constructive divergences which is what we wish to concentrate on in the present day.

On latest new lows markets have proven a variety of constructive divergences even in essentially the most weak sectors.

Let’s begin with maybe essentially the most weak sector: Banks

The brand new low on a constructive RSI divergence, which means the next low much like earlier ones seen over the previous 12 months, all adopted by a rally.

One other key danger issue for markets is high-yield credit score. Even right here we will be aware a pronounced constructive divergence:

On tech, arguably the strongest sector this 12 months, we will be aware a constructive divergence on the bullish share indicator the $BPNDX:

Whereas itself stays in a clear sample that has not damaged down, certainly has the potential for a bull flag on the broader index, additionally exhibiting a constructive divergence on its latest marginal new low whereas defending its 150MA:

What concerning the broader market? Equal weight has once more proven a poor efficiency in 2023 following a disastrous 2022. However right here too we will be aware a definite constructive divergence on new lows:

Much like October final 12 months.

The identical is true for the cumulative superior/decline index:

Whereas $SPX is thus far defending its pattern.

Of curiosity additionally a constructive divergence additionally on yields as I identified final Friday:

The weekly long-term chart provides extra context:

Not solely a constructive divergence but additionally seeing worth radically disconnected from its weekly 200MA, a historic technical imbalance solely seen as soon as final 12 months when yields ended up reversing for just a few months.

A phrase of warning: Divergences are dependable alerts solely as soon as confirmed by sustained worth motion in the wrong way, i.e. a confirmed reversal in pattern. On this case, if worth motion deteriorates additional then these constructive divergences can disappear and could have represented a false sign.

However nonetheless, they’re current in a large number in markets presently however require affirmation

The longer term route in yields is of explicit significance. Our debt-laden financial assemble is at the moment beholden to the doom loop I highlighted the opposite week:

Sven Henrich Tweet

And with it comes the chance of over-tighening:

Sven Henrich Tweet

A tough touchdown would comply with with it. Some could even say the injury is already accomplished and a tough touchdown is unavoidable. Maybe.

However I say don’t underestimate the runway of reduction that comes with a peak in yields. No less than initially.

For reference right here’s what occurs traditionally to markets when the 1 12 months rolls over from its peak:

Markets are inclined to rally arduous till then one thing truly does break. That runway may very well be months, it may very well be years.

Why? As a result of a reversal in yields not solely truly acts as a psychological reduction increase it truly tends to translate into increasing earnings, one thing we additionally noticed over the past price hike cycle which resulted in 2006:

The rolled over and GAAP earnings grew and markets exploded larger ending in new all-time highs first earlier than something broke.

The place are we now? GAAP earnings are literally barely larger than they have been 2 years in the past and have been rising:

Regardless of longer length yields such because the having risen dramatically in latest weeks the 1-year yield has been stalling in latest months. What occurs if it reverses and these constructive divergences at the moment seen in markets set off? If 2006 is any indication markets could nicely explode larger.

No, the dangers are very a lot dominant on this surroundings, sentiment is dire and markets are on the fringe of breaking down it appears and both one of many present three Dying Stars as I name them, yields, greenback & wars, could nicely take them over the sting.

However I submit that whereas all of us can solely concentrate on the negatives keeping track of the lurking positives is an equally worthwhile train for a lot of issues can go incorrect, however what if some issues go proper?

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