Technical Picture Deteriorates

Thu, May 17, 2012 - 3:56pm

The signs of a short-term bottom in the S&P 500 last week were capped by the bears at 1364. Fears over a bank run in Europe have driven investors to step to the sidelines. We had a few positive incremental pieces of data over the past month, but they were for naught as the technical picture continues to deteriorate. It’s beginning to look a lot like Christmas August.

There are many technical indications that are showing that risk is off the plate. Here are some of the technical indicators flashing some concern.

Dow Theory

Both the Dow Industrial Average and the Dow Transport Average are breaking down. Tuesday the Dow Industrials closed below 12700 support, and today the Transports are finally breaking support after holding for three months above 5050.

Losing Breadth

As I mentioned last week and in other recent market observations, my favorite long-term sell signal is the percentage of stocks above the 200-day moving average within the S&P 500. This indicator flashed a sell signal last week when it broke below 70%. The last two deteriorations had a short-term rally to sell into. That’s still a possibility here, but the indicator is clearly showing the same sell signal indicated in the 2010 and 2011 tops. Today, only 55% of stocks in the S&P are above their long-term 200-day moving average. If you used that as a bull/bear market indicator, only 55% of stocks are in a bull market.

From an intermediate term view, the market is becoming oversold, but this indicator can puke out in the low single digits. Today I show it at 17%.

Where to Invest

At this point, with the market topping, the areas that will do well on a relative basis are your defensive sectors. Like last year they were utilities, health care, and staples. Today, the sectors and industry groups that were hurt the most were the darlings of the first quarter—the areas I mentioned to watch if we bounced at March support. Now that support is giving way, watch for some of these darlings to fall out of bed. The sectors to underweight now are consumer discretionary, financials, and technology; while the industry groups are housing, biotech, and retail.

Yesterday, we got the first piece of incremental data on easing from the Fed. The minutes suggested that several members are now considering bond purchases from the last meeting, in which only a “couple” were considering it. So in Fed-speak, that’s an uptick in easing. The Philadelphia Fed data today was pretty bad and caused a spike in gold and silver. The more weak economic data becomes, the more likely we’ll see the Fed ease. Economic data has been a pretty mixed picture recently with significant strength in the ISM manufacturing on May 1st, and the NY Empire Survey last Tuesday. While the economic data works itself out, Europe continues to worry investors. Be cautious investing here as the technical indicators have deteriorated, but also keep an eye on the Fed and the ECB. Policy makers will likely respond and soon.

About the Author

Chief Executive Officer, Technical Analyst
ryan [dot] puplava [at] financialsense [dot] com ()