Market Needs a Reset Button

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Riddle me this: The S&P 500 currently sits about 2% off its all-time highs, unemployment levels are the lowest in a long time (although the rate of change is slowing… shhh, don’t tell anyone) but the Federal Reserve can’t raise rates by a quarter point? Seriously, something’s amiss.

If you have read this column over the past week or so, you have seen a myriad of charts pointing to exhaustion in the market’s melt up and should be well aware of the potential danger in stocks and other risk assets.

On Wednesday, despite a 6% drop in Apple Inc. (AAPL) after its weak earnings report, stocks largely ended higher with the small-cap Russell 2000 leading the “charge” for the second day in a row.

Are small caps becoming the new “safety trade”? I ask this jokingly, of course, because small caps, both in absolute and relative terms, are approaching a massive layer of technical resistance, which I discussed in the April 26 Daily Market Outlook.

As for the Fed, it is in a tight spot and surprised just about no one by keeping rates unchanged and remaining data dependent. Stocks flip-flopped in reaction to the non-news out of the FOMC meeting, although bank stocks did close off their highs. I reiterate my call to sell or short banking stocks here, as neither slowing economic growth nor a Fed that can’t raise rates is bullish for the large banks.

While the S&P 500 has been trading in a choppy manner for weeks, the going over the past seven trading days has taken place in an especially tight range. On the chart below, note that six out of the past seven days have registered doji candles, where the index closed nearly flat for the day.

S&P 500 Chart
Click to Enlarge

As long as the S&P 500 holds above its 21-day simple moving average (yellow line), it is by definition still trending higher. These doji candles reflect indecision in the marketplace, which I might add is taking place just as we head into the seasonally weak period of May through October.

I will wrap up today’s missive with another look at the multiyear NYSE Composite chart. The well-diversified index has arrived back at its 100-week simple moving average, which acted as support until August.

NYSE Composite Chart
Click to Enlarge

However, a sustained break above this line in the sand is very unlikely given how far it has already travelled off the January/February lows and the near historic overbought readings on momentum oscillators.

Conclusion

Stay patient and don’t chase stocks higher here. At the very least, some significant sideways consolidation is desperately needed to reset these charts.

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-market-needs-reset-button/.

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