Is the Stock Market Retreat Progressing Toward A Bearish Downturn? Here’s What To Monitor

(CTN News) – The year 2023 has seen its fair share of market turbulence, leaving investors understandably apprehensive about whether the recent stock market dip will evolve into a full-fledged bear market.

To gain insight into the market’s direction, many are turning their gaze towards the interplay between cyclical and defensive stocks. In this blog post, we will delve into the present state of the stock market and the crucial factors to watch for indications of a potential bearish trend.

The Current Stock Market Scenario

Currently, the U.S. stock market is undergoing a fairly typical pullback.

Nevertheless, Jeff deGraaf, a seasoned Wall Street macro analyst who serves as the Chairman and Head of Technical Research at Renaissance Macro Research, has provided valuable perspectives on what might lie ahead.

The S&P 500 index recently reached a new 65-day low, with signs suggesting a weakening trend for the year. According to deGraaf, it’s likely that the market will test the 200-day moving average (DMA) of the large-cap benchmark, which is roughly 3% below its current level.

He posits that the 200-DMA could potentially act as a support level during this downturn.

However, the real concern lies in the dynamics between cyclical and defensive stocks.

Cyclicals vs. Defensives

Cyclical stocks are particularly sensitive to economic cycles. They tend to thrive during economic booms but may struggle when economic conditions weaken.

Conversely, defensive stocks typically offer more stability during economic downturns but may not present the same growth potential as cyclical stocks.

The recent surge in Treasury yields, including a 10-year note reaching a 16-year high, is placing pressure on cyclical stocks. DeGraaf suggests that rising yields might pose challenges to the performance of cyclical stocks when compared to defensive stocks.

While there has been some weakness in the cyclical vs. defensive trade, the bullish relative trend remains intact. DeGraaf stresses the importance of closely monitoring this trend for any signs of deterioration.

However, he advises against hasty rotations into defensive stocks, as charts indicate that they may not be poised for significant gains.

Focus on Midcap Staples

While the overall defensive sector may not be a clear winner in the current market environment, deGraaf highlights one area within defensive stocks that is exhibiting strength – midcap staples.

These stocks have quietly reached new highs within a basing pattern, suggesting potential opportunities for investors seeking a defensive position.

Market Performance

At the time of writing, U.S. stocks have experienced a noticeable decline, with the S&P 500 down by 1.5%, trading near 4,273. The S&P 500’s 200-day moving average, a critical indicator for long-term trends, stands at 4,194.68.

The index has retraced about 5.5% from its 52-week high set on July 31, 2023, but it still maintains a year-to-date gain of approximately 13%.

The Dow Jones Industrial Average has also seen a decline, down approximately 400 points or 1.2%, trading near 33,605. It is on track to close below its 200-day moving average, a level it hasn’t touched since May 25, 2023.

As investors navigate the current stock market landscape, the relationship between cyclicals and defensives remains a critical indicator to monitor for potential shifts in market sentiment.

While the market has experienced a pullback, it’s essential to approach defensive stocks with caution and explore areas like midcap staples for potential opportunities.

The breach of the 200-day moving average continues to be a significant support level, potentially signaling a more bearish trend.

Given the lingering uncertainty, staying well-informed and closely monitoring market dynamics will be crucial for investors making informed decisions in these volatile times.