Will this failed signal lead to a market bottom?
Last week, I published a chart that suggested that the market (SPY) was about to enter capitulation mode. The signal was that the rate of change of high yield spreads (bottom panel) had crossed above a level that in 2008, 2011 and 2020 signaled capitulation. However, the indicator has now dropped back below the signal line rather than following through. In other words, it was a failed signal. That happens in technical analysis, but a failed signal can often be an important signal of its own...
There has been one other failed signal over this period, in 2018. Then, like now, the rate of change very briefly crossed the signal line before dropping back below. Also then, like now, the level of high yield spreads remained above 4.50 (see middle panel). This failed signal coincided with a market bottom. Will the past repeat itself? I can't say for sure, and we will need to watch how the situation unfolds. But this is certainly a signal of caution for the bears. There are other factors that suggest a possible rally, in the short-term at least. These will be subjects of additional posts.
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There has been one other failed signal over this period, in 2018. Then, like now, the rate of change very briefly crossed the signal line before dropping back below. Also then, like now, the level of high yield spreads remained above 4.50 (see middle panel). This failed signal coincided with a market bottom. Will the past repeat itself? I can't say for sure, and we will need to watch how the situation unfolds. But this is certainly a signal of caution for the bears. There are other factors that suggest a possible rally, in the short-term at least. These will be subjects of additional posts.
If you found this analysis helpful, please give me a thumbs up and a follow! Thank you!
