Bad News: Wall of Worry is Giving Way to Uncertainty
I am no longer bullish on the stock market, which
is not to say that I am bearish. Mostly I’m not sure as to what’s next,
which makes me very uncomfortable. In fact, I am uncertain about the future.
And if I’m uncertain so are a lot of other traders. And why does that matter?
Consider this: It’s well known that bull markets climb walls of worry.
What is less appreciated is that markets that generate uncertainty are
known for their volatility. And if last week’s selling in technology and
the transport stocks is any clue as to what’s next, we may have a lot more
to worry about in the next few weeks than whether Congress can actually
get anything done before their delayed summer break.
I want to be both clear and specific here, as this is becoming a potentially
dicey situation. First, as I will detail just below, trading volume – the
lifeblood of stocks - is starting to shrink. This is likely to make the
market more vulnerable to sellers during a volatile period. Second, money
is moving out of some stock sectors and into commodities. And third, earnings
season has been a very all or nothing affair.
I am particularly concerned about the market’s response to earnings.
To put it plainly, there have just been too many air pockets, those awful
crashes in the stocks where the companies miss analyst expectations. I
have no hard data on how many stocks have missed expectations, but I know
that the market has been most unkind to many companies who have not made
their numbers. More alarming is the fact that some stocks where the company
has actually met expectations and has given positive forward guidance still
got crushed. When you put this trio of arguments together, there is only
one conclusion, it’s not a good time to be an aggressive investor.
S & P 500 Looks Tired
The S & P 500 (SPX) is within reach of yet another all time high.
Normally, I would be excited about this, especially when the market’s breadth,
as measured by the NYSE Advance Decline line (NYAD) – see below – is also
acting as well as it has lately.
being aggressively bought. Indeed, it’s as if the selective buyers
are filling a leaky bucket with their money. Breadth Is Slightly Wobbly The
unusual relationship between On Balance Volume and Accumulation/Distribution
highlighted above is also visible in the NYSE Advance Decline line, which
is near a new high, but also seems to be struggling as the number of advancing
stocks is starting to shrink.
In fact, the current posture of the NYAD is similar to what we
saw in March 2017, where the RSI indicator was overbought while the
ROC indicator was showing a potential momentum shift. If this plays
out as it did in March, we can expect at least a short term pullback
in the stock market.
Transports Crash while Oil Rallies
Perhaps one of the most reliable relationships in the market is
that of the Dow Jones Transport Index (TRAN) and the price of crude
oil (WTIC). Traditionally, these two markets move in the opposite
As the charts of both the transports and crude oil show, this relationship
is currently following tradition. Indeed, money stampeded out of
the transports last week, as the railroads issued guarded guidance
comments about the third quarter, while money moved into crude oil
in hopes that OPEC can cut production while at the same time the
number of active rigs in North America may have topped out.
It’s a Good Time to be Patient
I don’t know if a bear market is around the corner. But it seems
as if the market is going to take a breather. One way for this to
unfold is for stock prices to move sideways. An equally possible
method would be for stocks to sell off, perhaps dramatically. We
saw some serious selling last week in the technology sector along
with the transports. The bottom line is that there is no longer a
wall of worry keeping this market up. We have transitioned from worry
to uncertainty. Worried markets rally. Uncertain markets are known
for high levels of volatility.
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