Bearish Undertones
"Risk happens fast." Or whatever the smart alecks in the media and Twitter say. But it is hard to deny that there are some bearish undertones to the market these days, at least over the short term. Is it because someone Tweeted something? Is it because of interest rates? Is it because of the US Dollar? Is it because Anthony Davis went to the Lakers? We may never know. But what we do know is there are a few cracks in regards to price action that are beginning to show up.
Fellow TCR contributor Nick Marino mentions a failed breakout on both the S&P 500 ($SPX) and the Equal-Weight S&P 500 ($RSP):
David Larew brings to our attention that the S&P 500 ($SPY) had been in what is considered a typically bearish pattern, and the result has been bearish indeed:
The relative strength of one of the strongest areas of the market, Software ($IGV), has been getting weaker. Is this a sign of trouble?
On Thursday after the close, Mark Newton of Newton Advisors noted that we need to see a rebound the next day (Friday) in order to stave off a pullback. Unfortunately, that did not happen.
TDAmeritrade's Michael McKerr reminds us that the S&P 500 has been building a bearish divergence for a while now, and that action may very well finally be coming to fruition:
As noted below, sentiment has become very bullish. In fact, the last two times the DSI on the Nasdaq ($NDX) was this high, we saw short-term tops:
If the markets do indeed sell-off, will we get a spike in Volatility, which has been subdued for a long time? And if we do, how high will the spike go?
While we don't know how long a correction would last, or if a correction is even on the horizon, to begin with, there are certainly some signals out there that caution may be warranted. While the S&P 500 has indeed crept higher over the past two months, hitting all-time highs just a week ago, momentum has begun to dwindle. A confirmation of failed breakouts on other indices, such as the Dow Jones Industrial Average ($DJI) and Nasdaq ($NDX) would be more evidence of the market potentially rolling over. Sentiment has become extreme and the VIX ($VIX) has been held under 20 for a while now. If both were to reverse, will it lead to a big shakeup for the market as a whole? Or would price continue to march upwards in tandem with volatility, as we have seen in select environments before? Only time will tell, but the charts above give you a good base of things to be on the lookout for in the coming days and weeks.