3 Reasons to Not Trust This Market

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Once again, critical technical support at the S&P 500’s 200-day moving average was supported. The Greek debt drama amounted to nothing. The Fed is busily finding new reasons to hold off on rate hikes. Stock investors are largely shrugging off precipitous declines in foreign stocks, high-yield bonds, and commodities.

But, the evidence is building that the stability of the large-cap index, which has returned to its year-long trading range, is masking deeper trouble beneath the surface. Here are three reasons to worry.

Picture Perfect Rebound

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Jason Goepfert at SentimenTrader warns that the obvious defense of the S&P 500’s 200-day moving average on Monday and Tuesday could prove troublesome: A similarly vigorous rebound off of this level preceded the last three major pullbacks in the stock market in 2000, 2007, and 2011.

In other words, this looks more like pre-programmed short covering or outright market manipulation, rather than real, human buying.

Market Breadth

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Technically, breadth remains challenging with just 51% of the stocks in the S&P 500 in uptrends, versus more than 75% back in April. That’s a sign stock buyers are finding fewer issues interesting at these prices. And, it’s a sign that the bulls are relying on a narrowing group of stocks to hold the overall averages aloft. Historically, that’s a sign of vulnerability.

Another way to look at this is to screen for a list of S&P 500 companies below their 200-, 50-, and 20-day moving averages. A total of 153 components are in deep decline, including names such as Procter & Gamble (PG), Oracle (ORCL), IBM (IBM), Intel (INTC), 3M (MMM), and Caterpillar (CAT). These are being offset by a number of mega-cap tech stocks that are heavily weighed within the index, including Google (GOOG), Microsoft (MSFT), Facebook (FB), and Amazon (AMZN).

Fundamentals

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So far, according to FactSet data, the S&P 500’s blended earnings are set to decline 2.2% for Q2 over last year — on track for the first drop in profitability since 2012. Energy sector earnings have been the drag (S&P 500 blended earning would be set to grow 4% without them) and will be in focus this week as Exxon Mobil (XOM) and Chevron (CVX) report results on Friday.

Looking ahead, analysts expect year-over-year earnings declines to continue through the third quarter, while year-over-year revenue declines are expected through the end of the year.

The catalyst for the decline in profitability has been the stronger U.S. Dollar (which will be made worse should the Fed actually hike rates this year), lower energy prices (as the Saudis continue their fight against U.S. shale while Iranian exports prepare to hit the market), and a slowdown in China (an ongoing problem).

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers. Clink the links above to sign up.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/3-reasons-not-trust-market-spx-bpspx/.

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