Warning signs have piled up for months, but there have been few breakdowns to confirm all of these bearish signals. That changed last week as volume surged leading to breakdowns across many of our major indices, sectors and industry groups. One obvious problem was the S&P 500's inability to protect its 50 day SMA. Check out this 6 month chart:
If you look back, you'll see that the S&P 500 surrendered its 50 day SMA in January and April, only to recover and extend its current bull market. But there is a difference this time. Many intermarket relationships began changing in March. Money shifted from aggressive areas of the market to defensive areas. That rotation kept the market afloat and even led to further gains in the S&P 500, but the gains - as I've stated on several occasions - have not been healthy gains, the kind that we can depend on to sustain the 5 1/2 year bull market.
The Russell 2000 has badly lagged the S&P 500 since March. Banks have done likewise. Among consumer stocks, discretionary names have taken a back seat to staples. These are all relationships that normally precede market weakness, not market strength. Think about it. If our economy were truly expected to strengthen, wouldn't you want to park your money in aggressive areas of the stock market, in companies whose bottom lines would benefit the most? Instead, market participants have been doing the opposite and taking a very defensive-minded approach to stocks.
Home construction stocks have been absolutely clobbered since June new home sales were reported on July 24th. If you recall, May new home sales were reported at the highest level in 6 years. But the June report revised those May sales SIGNIFICANTLY lower, then followed that up with a HUGE miss in June. The Dow Jones US Home Construction index ($DJUSHB) responded by falling 11% in 8 trading days, closing beneath key technical price support at 460 in the process. Here's the visual:
In the past 8 sessions, the DJUSHB has lost trendline support, short-term price support at 485, 20 day EMA support, 50 day SMA support and intermediate-term price support at 460. Buyers have disappeared - and all at a time when the 10 year treasury yield ($TNX) has been kept artificially low by the Federal Reserve. The TNX finished last week at 2.50% so higher interest rates aren't spooking homebuilders, so what is? That answer really doesn't matter to me, I only care that the breakdown and awful performance is occurring. The talking heads can debate why. Technicians don't ask "why" questions. They leave that to the fundamentalists, who usually arrive late to the party.
We're just beginning to see technical deterioration in the market. The biggest question is will it continue and how bad might it get? I just take it one sector and industry group at a time.
Software ($DJUSSW) failed to hold onto price support late last week and finished just beneath its 50 day SMA on Friday. One of its component stocks reports earnings on Monday after the bell and I've taken a look at the chart in my latest Earnings Preview at EarningsBeats.com. A bad report here could send software stocks spiraling lower as well. You can CLICK HERE to receive this chart for FREE.
Happy trading!
Tom Bowley
Chief Market Strategist/Chief Equity Strategist
Invested Central/Earnings Beats.com
