alice

NFTRH; The US Stock Market’s Ample Signaling Beneath the Surface (high priority)

While the US stock market is generally testing the 200 day moving averages, it is not as simple for the bulls as just a technical test for the indexes. The higher highs of September to February were attended by degrading internals like flagging leadership (ex. Semi to Tech, Tech to broad market), rotation into defensive areas and worsening market breadth by indicators like Advance/Decline, Equal Weight and Highs/Lows.

Those are the primary reasons why I had felt a rebound to the 50 day moving averages could be a good shorting opportunity. But if it does not successfully test the 200 day averages and bounce hard future shorting opportunity would be after a breakdown. Per this chart, a real correction could bring SPX all the way down to the 2100-2200 area, completely erasing the post-election rally. Check out the negative RSI divergence at the recent top. Add that as a negative input along with the internals noted above.

spx

This public post shows the daily charts of SPX, Dow and NDX and their respective daily uptrends (50 & 200 day averages rising). Despite the degrading internals, the trend is what it is and when I look at the weekly SPX above I think that it is worth having patience as a bear in the event they try to bull it back up again. The weekly trend line is another caution marker for bears. Sure, it could break at any moment. But it has not yet broken, and that is my point.

Barring a big bounce now I’d rather wait for this market to fall apart to short it on a new setup because that is a long way down to the major support zone. In this post we compared the Housing index’s equivalent support and wondered if it could be scouting a path for SPX down there one day.

All of which is to say that there are reasons in play to be bearish, but the trend remains bullish. All we need is to lose these trends and the market flips bearish in line with the flagging internals. So let’s look at a few internal signals.

Daily Yield Curve maintains a short-term steepener potential. A steepening yield curve would not be desirable for stock bulls. So at best right now, the YC is not presenting a positive divergence for the stock market. At worst it would continue to steepen.

The more cyclical Consumer Discretionary is breaking down again vs. the Staples. This is defensive market behavior and again, no positive divergence.

Copper/Gold and Industrial Metals/Gold ratios remain weak. Again, no positive divergence. PALL/Gold is bullish although it could be getting toppy here.

I usually make fun of Dow Theory but this is a hard down in the Transports relative to the Dow. A negative divergence that gets some distinguished gentlemen very concerned.

And look what we have here; Tranny is testing and so far failing a breakdown from its 200 day average. So, is this a leader or not? The Dow Theorists may yet find that nut.

Semi has been leading Tech down. We discuss that frequently. We discuss the failing leadership of the Internet stocks less frequently, but it is another sign of a market shimmying toward relative risk ‘off’ and defensive behavior.

Tech is still leading the S&P 500 as both moving averages are trending up. But there again is that rolling over potential.

And SPX/Gold ratio took a hard crack within its uptrend. It has so far failed to bounce.

But the reason to pay attention here is because this one is a potential macro changer. The target was laid out back in 2015 or 2016 per the monthly chart below (Amigo #1) and it has come close enough to be on high alert. The gap up above is there to be filled if today’s angst becomes tomorrow’s greed fest. But if this chart could talk it might say something like “oh man, I have worked for years on end to recalibrate investors’ expectations, to make them forget what fear feels like.”

Well Mr. Chart, good job. It’s a whole new flock of lemmings and a lot of good (or bad, depending on how you view it) work has been done. Think about this for a moment. If the SPX were to pull back to the 2100-2200 area per the 1st chart of this update, the SPX/Gold ratio might only pull back to the 2015-2016 top area on this indicator. Again, as with SPX all this does is erase the post-election rally. We’re not forecasting the end of the world here. We can leave that for the professional doom forecasters.

Bottom Line

It appears time for the US stock market to correct. Now, will it? A bounce to clear the negativity is still very doable. But the internal divergences at the September top are a concern.

Among other divergences domestically, the world has literally been negatively diverging the Good Ship Lollypop.

One wonders how long it can sail these seas without hitting a rock and taking on water.

The trend is up. The negative divergences are there. Cash is paying yet another +.25% increment courtesy of Mr. Powell’s Fed.

We are about to enter the bullish November-May seasonal average. The market’s uptrend argues caution against an active bear stance for most of us (I know there are real bear day traders out there, but I am not one of them) and the fading internals argue that a bounce to the 50 day averages could be a good shorting opportunity. Alternatively, a breakdown of the market’s uptrends could signal a major support test, which would be trade-able. Alternative to that, cash is always good until the situation clears.

It makes me uncomfortable to be sounding bearish after a healthy decline like the market took over the last couple of weeks. Usually I am the opposite… if given reason in the form of sentiment and positive divergences. So even if the market bounces hard, until it clears the internals and leadership issues (not to mention the 50 day averages), a defensive posture seems to be a sound plan with cash equivalents paying income, no less.