Technicals….a Warning Sign?

The S&P500 lost 1.5% last week on moderate volume. Volatility inched higher, but at 17.8 the VIX index is still far closer to multi-year lows than to multi-year highs. This means that there still has been no panic selling. Is that yet to come?

The macro news in the US is not getting stronger. Both the Richmond Fed and the Kansas City Fed manufacturing surveys badly missed their respective estimates. New home sales just about met expectations, but the pending home sales index missed. Flash manufacturing PMI also missed. Durable goods beat expectations, but this had nothing to do with the private sector; apparently, government purchases soared, and this can hardly be expected to continue. And the first estimate of Q3 GDP came in slightly better than expected, but still it was not a strong number (at only 2.0%) and most recent first estimates have been revised downward; there’s a good chance that this one will be slashed too.

The S&P500 has violated several technical barriers and is now poised to sell off further, barring any surprise intervention or manipulation by the Fed or the other major central banks of the world.

While the S&P could be slightly oversold on a short-term basis, its multi-month climb since June appears to be coming to an end. First, the uptrend that began in early June has been broken. Several commonly followed momentum and oscillator indicators are also pointing to more selling. MACD has moved into negative territory for the first time since late June. RSI is now in a bearish zone.

In terms of breadth, the McClellan oscillator has weakened notably since early September. And the same applies to the summation index. The percent of stocks above the 150 day moving average is turning down, as is the percent of stocks above the 50 day moving average. Also, the new highs minus the new lows is weakening notably.

Next, sentiment is beginning to weaken. The S&P bullish percent index is beginning to fall, and still has a long way to go before becoming too bearish, and thus pointing to a buying period from a contrarian point of view. A similar story is being told among professional traders, who are now starting to raise their Put/Call option ratios, in order to provide more protection for their long positions.

So not only are prices turning lower, but the market internals are breaking down. As more and more firms announce poor 3rd quarter results and issue warnings for the 4th quarter, it’s becoming clear that no amount of money printing by the Fed can magically create stronger corporate sales and earnings.

As a result, stock prices are poised to grind lower. Unless investors accept much higher P/E ratios (as Earnings keep falling), stock prices will have a difficult time maintaining their current levels….even after a 4% sell-off from recent peaks.



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