The Bears Wave the Caution Flag Again, But Don't Read Too Much Into it Yet

Posted by jbrumley on July 19, 2018 5:25 PM

Thursday's market action was bearish, but if you're reading this, you probably already know that. What you may not know is that there were a couple of winning sectors on Thursday, and the sectors logging the biggest losses were the ones investors least wanted to fall. In short, we're seeing interest in safe havens and a fear of aggressive growth arenas. It's a general hint that traders have already mapped out market weakness in their minds. A self-fulfilling prophecy may be in the cards, and that's not a good thing.

The graphic below tells the tale, not just of Thursday, but for the past twelve months. Technology stocks remain at the top of the heap, but they're increasingly struggling to keep the rally going. They were Thursday's biggest loser, followed closely by the financial stocks - a surprising bout of weakness given the bullish knee-jerk response to solid bank earnings reports earlier this week. At the other end the spectrum were utility stocks, which weren't just Thursday's biggest winners, but have surprised everyone by logging the market's best one-month performance. Second-best on Thursday were consumer goods.

If you need to be told, here it is: Utilities and consumer goods names are areas investors seek out as safe havens when they're expecting a market headwind. Technology stocks are stocks that become major liabilities when the market takes a turn for the worst. Financial stocks are also liabilities in a rough environment, albeit to a lesser degree.

What's so curious about the current situation is that we've actually, quietly seen safe havens outperform the more aggressive sectors for the past month.

That's not the only sign that there could be trouble ahead, however.

This is a chart you've seen before, but it merits a fresh look now. That is, a look at the market's bullish volume in comparison to its bearish volume. Though the S&P 500 had been rallying since early July, the amount of daily bullish volume has been shrinking. Conversely, although the market was rising since early July, bearish volume was on the rise with it.

It was only a matter of time before the lack of participation in the rally - in step with a growing selling effort - caught up with the market. There was no clear reason for Thursday's lull. It was largely the result that traders have been working on days ago. It just took some time to come to fruition.

There's a problem with this way of thinking... a flaw in the assumption. That is, we've seen these clues before. In fact, we've seen them a lot, just in recent months. So far, the bulls haven't been willing to lay down for very long.

Maybe this time will be different. Maybe. We can assume nothing though, even if we know we're overdue for a more severe correction.

As for how far any pullback MIGHT drag the S&P down, we know pretty well where the limits are. The S&P 500's key moving average lines have all been support levels of late (even more than usual), and will likely be make-or-break levels again. The 200-day moving average line (green) is the biggie, at 2686. But, the 100-day moving average line (gray) at 2713 was the underlying springboard for the current rally effort. Watch both.

Of course, the 20-day and 50-day lines (blue and purple, respectively) are also prospective support levels.

The 'big one' would only be the point where the S&P 500 breaks below the 200-day line rather than finding support at it, as it has several times since February. There's nothing about the aforementioned sector rotation or the aforementioned lack of bullish volume and growing bearish volume that would necessarily pull the index below that line. It would take some serious work from the bears to set up a break below the 200-day line.

Nevertheless, the trip from where the index is now and either the 100-day average or the 200-day average would make for pretty good trades, and the clues above are suggesting a move of that scope is possible.

Whatever's in the cards, it all remains a day-to-day affair in this oddly-indecisive, politically-charged environment.

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