Is the Bull Market in Danger?

On Tuesday, stocks were pounded with losses for the fifth straight day, the longest losing streak for the S&P 500 in over a year. Eight of the S&P’s 10 sectors ended in the red. The volatile small-cap stocks of the Russell 2000 led the decline, falling 1.7%.

Lower crude prices were blamed for the selling, but Greece’s renewed political problems also dominated the news.

Defensive investments such as U.S. Treasury bonds, utilities and health care stocks were up. Gold and other precious metals have also been revived as investors seek a safer haven than stocks. The yield of the 10-year Treasury note fell to 1.96%, down from 2.04% on Monday. Gold futures jumped 1.3% to $1,219.30 an ounce.

Stocks were down slightly after the opening, but concerns from abroad, lower oil prices, and bond king Bill Gross’ negative outlook for 2015 triggered another round of selling.

Economic reports offered little solace. The service sector’s growth was slower than forecast. The Institute for Supply Management’s nonmanufacturing purchasing managers’ index fell to 56.2 in December from 59.3 in November, where a reading of 58.5 was expected. Factory orders fell less than expected in November, dropping 0.7% versus an estimated 0.8% decline.

At Tuesday’s close, the Dow Jones Industrial Average was down 130 points at 17,372, the S&P 500 lost 18 points at 2,003, the Nasdaq dropped 60 points to 4,593, and the Russell 2000 was hit with a 20-point loss at 1,161.

The NYSE’s primary market traded 942 million shares with total volume of 4.4 billion shares, and Nasdaq crossed 2.1 billion shares. Decliners outpaced advancers on the Big Board by 2-to-1, and on Nasdaq by 3-to-1.

DJI Chart
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Chart Key

The Dow industrials fell through their 50-day moving average at 17,616 without the slightest sign of support. However, the support band at 17,145 to 17,280 did hold with the low of the day at 17,262.

This band should provide temporary support, but the penetration of the 50-day moving average is generally considered by technicians to be a violation of the intermediate trend. MACD also issued a sell signal.

DJT Chart
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The failure of the Dow Jones Transportation Average to set a new high following the industrials’ new high in December is considered by Dow theorists to be a non-confirmation and a serious violation of the immediate and intermediate trends. Until this non-confirmation is resolved, it even places the long-term trend in doubt.

Like the industrials, the transports’ MACD issued a sell signal.


The non-confirmation of the Dow transports is more serious than any other technical issue. Combined with other negative signals, it places the overall bull market in a gray area.

The transportation index is a major forecasting tool used by analysts to estimate economic activity in the next six to nine months. Its failure to make a new high, therefore, supports Bill Gross’ economic forecast.

Other less significant technical indicators are also bearish. All of our internal indicators like MACD, stochastics, momentum, etc., are negative. And the AAII sentiment survey, a contrarian indicator, shows bulls at 51.74%, one of the highest bullish percentages in the past 12 months.

Though stocks may rally today and even through the end of the week from a temporally oversold position, the bull market’s direction is in question. Until it is fully resolved, I recommend only investing in defensive sectors like utilities, biotech and other medical stocks, and precious metals. It is time to be very cautious.

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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