Market Technical Picture Deteriorates
The S&P 500’s decline has now stretched to five weeks. This is the first five week decline since June and July of 2008. The S&P 500, Dow, and NASDAQ all closed below their respective 4 and 12 week exponential moving averages. This signals that the intermediate term trend in the market, until the averages close above those moving averages, is now negative. The monthly bias remains positive as the markets remain above their 12 and 20 month moving averages.
The daily bias on the markets is also negative as the markets closed Friday at six week lows. The selloff on Friday was sparked by the morning employment data. Nonfarm payrolls for May climbed by 54,000, which is less that the 169,000 additions that had been expected. While the employment data was weaker than expected, the ISM non-manufacturing survey was better than expected. The S&P 500 was off 2.2% for the week after declining 1.35% in May.
49% of the stocks in the S&P 500 are either basing or advancing. Only 46% in the broader markets stocks are technically sound. Prudence is key here. In this environment you have just a coin flips chance of picking winners. Make sure you pay attention to the charts of the stocks in your portfolio. There is a rotation out of past winners and investors are reducing the overall risk of their portfolios.
The recent economic data and seasonal factors have led investors to question the strength of the global economy. The market broke above a recent down trend just on Tuesday of last week, breaking the cycle of lower highs and lower lows. That abruptly changed Wednesday. The market sold off sharply in response to weaker-than-expected ADP employment data. All market technical readings on Tuesday were extremely positive. That story completely reversed on Wednesday. The sell-off continued Friday. The action of the market has been erratic and underscores how confused investors are at the moment. To see such strong action in the market early last week followed by aggressive selling is cause for alarm.
For now the bears are in control of the market. The S&P is still up for the year. However, the technical readings of the market have deteriorated significantly over the past few weeks. The key levels of support are 1294 S&P 500, 12,090 Dow, and 2705 NASDAQ. If these levels are broken the intermediate term trend will be negative and the sell-off will likely accelerate.
We should use rallies in names that are deteriorating to sell stocks. 1294 on the S&P 500 marks a 62% retracement of the March low/May high rally. The swiftness of the selling since the high in May is worrisome and signals that rallies should be used to reduce the risk profile of portfolios.
About Thomas J Smith CFA
Thomas J Smith CFA Archive
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