It was all going so well. Federal Reserve chairman Janet Yellen was in front of Congress this week brandishing her dovish tendencies. Large-cap stocks are pushing to new highs. CNBC was attacking the skeptics on air with great vitriol. All was right in the world.
But all changed on Thursday after a Russian surface-to-air missile streaked through the East Ukrainian sky and, in a flash, ended nearly 300 lives at 30,000 feet when it brought down a Malaysian 777 airline bound for Kuala Lumpur. Both Kiev and the pro-Russian separatists are blaming each other, but it’s clear that this is going to escalate the situation — especially in the wake of yesterday’s new U.S. economic sanctions against Russia.
But the bigger story is that this confirms the apprehension I noticed deep within the market earlier this week. Insiders didn’t know what, exactly, was going to spook the market … only that things had gone too far.
Breadth signals were sending warning signs. Jason Goepfert at SentimenTrader notes that with large cap indices near new highs, underlying breadth momentum has been badly lagging and is at one of its worst readings in more than 60 years.
Not convinced? Here are just a few of the ways you can see the problems with breadth momentum.
The Nasdaq 100 closed at a new high with net negative breadth on Wednesday: Up issues accounted for only 42% of the total. Of the 21 other times this has happened, the Nasdaq 100 was higher two days later only 38% of the time.
The Russell 2000 was struggling to stay above its 50-day moving average — a level it last lost in a meaningful way back during the March/April momentum/biotech pullback — which it lost in dramatic fashion on Thursday. Now, the Russell threatens its 200-day average.
A breakdown here would be bad news because, aside from a quick test below back in April and May, the Russell 2000 has remained above this level since this Fed-fueled stock market meltup started in 2012.
You can also see the breadth concerns in the way biotechnology stocks are coming under pressure again, with the Biotech iShares (IBB) down another 2.3% as I write this today. The fund is now nearing its 50-day moving average again for the first time since March. In response, I’ve recommended my subscribers add short leveraged exposure to the sector by adding an allocation to the ProShares UltraShort Biotech (BIS) — a position that is up more than 12% since added back on July 8.
And the concerns also show up in the way selling pressure is beginning to hit high-yield corporate bonds — an area of the financial system that has pretty much gone straight up since this time last year, providing a base of support to the stock market by empowering debt-funded share buybacks. But the iShares High Yield (HYG) has closed below its 50-day moving average for the first time since last August and is extending its decline below this key level, today.
It’s possible that the bond market is preparing for another “taper tantrum” like episode — of the type we saw last spring when Bernanke first broached the topic of rolling back QE3 — in preparation for the end of QE3 in October.
Disclosure: Anthony has recommended BIS to his clients.