3 Reasons the Selloff Isn’t Finished

by Anthony Mirhaydari | March 18, 2014 9:22 am

Stocks continue to oscillate wildly, gapping higher and lower on catalysts that should have them moving in the opposite direction. It’s as if the whole market has gone schizophrenic. Indeed, Sterne Agee’s technical analyst Carter Worth wrote in a note to clients, “there are so many issues with the market that it strains the imagination.”

selloffWhile the U.S. averages are not far off their record highs, emerging markets and even established markets like Japan are under pressure.

Outside of near-term issues like the specter of armed conflict in the Ukraine or the Federal Reserve’s need to modify its “forward guidance” language during its policy meeting later this week, big structural issues are in play here.

China must find a way to prick an out-of-control credit bubble without slowing its economy too much. Japan is struggling as “Abenomics” and its yen devaluation strategy loses its pizazz ahead of a looming a sales-tax hike.

All of this suggests that, even if the situation in the Crimea doesn’t devolve into a shooting war, the downside pressure will remain on the market.

There are also a few technical warnings signs suggesting the bears aren’t done just yet. Here are three worth watching:

Market Breadth

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As the selling intensifies, a wider and wider swatch of the market is being pulled under. You can see this in the chart of S&P 500 stocks in uptrends. I throw a Parabolic SAR overly onto the chart to highlight shifts in trend. Incredibly, despite all the volatility we’ve seen in March so far, the indicator remains in uptrend mode after jumping higher in early February.

But on Monday, despite the market rebounding higher, weak buying interest is pushing the number of S&P 500 stocks in uptrends to the cusp of a downtrend — the last of which was triggered in early January.

The signal isn’t a 100% accurate — technical signals never are — but it does suggest that the bulls are losing interest with more and more stocks at these levels. And that’s not a good sign.

Cyclicals vs. Defensives

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Another way to gauge the health of the market is to look at which sector groups are leading, and which are lagging. Since the beginning of the year, utility stocks have been the stars with the Utilities SPDR (XLU[1]) up more than 8% while the overall market is struggling to stay in the green year-to-date.

As a proxy for how aggressive investors are feeling — and thus, how confident they are — I like to watch the ratio of the Morgan Stanley Cyclicals Index vs. the Consumer Staples SPDR (XLP[2]), shown in the accompanying chart.

Here’s the kicker: The ratio is rolling over to an extent not seen since March 2013 as investors move into safe havens.

New Highs vs. New Lows

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And finally, in another measure of market breadth, the ratio of new highs on the NYSE vs. new lows is rolling over on a scale not seen since January’s selloff driven by fears over the health of the emerging markets.

A drop in the NYSE High-Low Index below its 20-day moving average, which has just happened, has been a consistent sell signal over the last year.

For now, I continue to recommend investors play it defensively with a focus on safe haven assets such as U.S. Treasury bonds, which I’ve added to my Edge Letter Sample Portfolio[3].

Anthony Mirhaydari is founder of the Edge[4] and Edge Pro[5] investment advisory newsletters, as well as Mirhaydari Capital Management[6], a registered investment advisory firm.

  1. XLU: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLU
  2. XLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLP
  3. Edge Letter Sample Portfolio: https://www.edgeletter.com/sample.php
  4. Edge: http://www.edgeletter.com/
  5. Edge Pro: http://www.edgeletterpro.com/
  6. Mirhaydari Capital Management: http://www.mirhaydaricapital.com

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