Bearish Reversal Doesn’t Bode Well for Stocks

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Investors took a decidedly risk-off approach Thursday, as stocks cascaded lower in the afternoon session, closing near the day’s lows after a failed rally attempt in the morning.

The sell-off was spurred by billionaire activist investor Carl Icahn, who went on CNBC and voiced concerns about Apple Inc. (AAPL), saying he sold his remaining position.

As the selling intensified, several hedge fund trading desks called me and expressed worry that a wave of selling could hit us in coming months due to seasonal weakness and the continued underperformance of large-cap technology stocks such as Apple.

I stopped short of saying, “I told you so,” despite all of the research and evidence of weakening market breadth I had sent them over the past few weeks. But I did remind them that stock markets have a tendency to develop intermediate-term tops in late April to early May. And I said the still low implied volatility levels, as represented by the Volatility S&P 500 (VIX), would be one way to buy protection and take a defensive approach as we slide into late spring.

Over the past few days, I have highlighted the continued relative and absolute weakness of the large-cap tech stocks of the Nasdaq 100. The ratio chart below compares the Nasdaq 100’s representative, the PowerShares QQQ Trust, Series 1 (ETF) (QQQ), and the SPDR S&P 500 ETF Trust (SPY).

QQQ vs SPY Chart
Click to Enlarge

Note that on this week’s selling spree, the ratio has broken below the neckline of what has been a massive head-and-shoulders pattern. (In case you didn’t know, we can apply technical analysis on ratio charts to gain some great perspective.)

Although tech stocks are potentially oversold near term, the breakdown points to further weakness in the sector in coming months.

On the next chart, I plotted The Industrial Select Sector SPDR Fund (XLI), the Consumer Discretionary SPDR (ETF) (XLY) and SPY. Thursday’s failed rally attempt marked the daily chart of each ETF with a notable bearish reversal.

XLI XLY SPY Chart
Click to Enlarge

The best example is XLI (top panel), which tried its best to match Wednesday’s intraday highs. But as buyers quickly exhausted themselves, the ETF drifted lower and closed at Wednesday’s lows.

Conclusion

With just one trading day left in the month of April, could it be that Thursday’s bearish reversals are the beginning of a better corrective period? The odds are fairly good, although a follow-through selling day is still needed to confirm.

However, even if stocks make one last push higher, the deterioration in market breadth over the past month or so makes a sustainable breakout very unlikely.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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As of this writing, Serge did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/daily-market-outlook-bearish-reversal-doesnt-bode-well-stocks/.

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