Although U.S. equities closed higher for the month of April, both market internals and the technical picture continue to flash warnings signs that the recent rally is too steep to be sustained.
Besides energy, the materials sector has been the best performer off the February lows, but its rate of change is slowing, and the move looks exhausted.
On the weekly chart of the Materials Select Sector SPDR (XLB), we see it closed above its 100-week moving average, which acted as solid support until it broke last summer.
Technical analysis 101 tells us former support is likely to become resistance, which is what I suspect will happen with XLB, at least in the near to medium term.
As we head into May, we must also keep in mind the seasonal headwinds that typically challenge stocks through summer. Historically, May is one of the worst months for stocks in terms of performance.
While that doesn’t necessarily mean the market will fall apart in coming months, the upside is likely to be capped. Either way, chasing stocks higher here makes little sense.
Since we’re about halfway through earnings season, more focus will shift to the Brexit vote in June and the U.S. presidential race, both of which could add to volatility in stocks, and other asset classes for that matter.
Last week, we saw renewed weakness in biotech stocks and some heavyweight technology names like Apple Inc. (AAPL). On the next chart, I plotted SPDR S&P 500 ETF Trust (SPY) in blue, iShares NASDAQ Biotechnology Index (ETF) (IBB) in red and the PowerShares QQQ Trust, Series 1 (ETF) (QQQ) in yellow. Note that IBB and QQQ are making a series of lower highs.
I point this out because I keep hearing bullish comments from the analyst crowd about how the S&P 500 will soon stage a major breakout. Given the above chart, I do not think a sustainable breakout in the broader market has a good chance of taking hold at this juncture.
Conclusion
While anything is possible in a central bank-steered market, the weight of evidence — from an economic, earnings, technical and seasonal perspective — points to stocks heading lower from here, or, at the very least, limited upside.
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.
