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Tue, December 10 at 7:00PM ET

Thorn in the Market’s Side Could Spell Trouble

The past two times this moving average crossover occurred, it was very bad for stocks

Stocks closed relatively flat Tuesday on little news following Monday’s Janet Yellen-infused rally.

The S&P 500 has climbed more than 4% from its May reaction lows, while the small-cap Russell 2000 is up almost 9% during that time. So Tuesday’s pause is not something to worry about… yet.

On conference calls with institutional investors on Tuesday, I repeatedly heard some sharp minds toss around the idea of heightened volatility in the second half of June when, among other things, we will get the next FOMC meeting and the Brexit vote.

Over the past couple of days, the smart money crowd I chat with on a daily basis has been busy buying some index protection by way of put options and put spreads on the S&P 500 and other equity indices. And they are not alone according to the Volatility S&P 500 (VIX), which rose nearly 3% on Tuesday despite stocks closing marginally higher on the day.

For our first chart, I plotted the Energy Select Sector SPDR (ETF) (XLE) at the top and PowerShares DB US Dollar Index Bullish (UUP) at the bottom.

Click to Enlarge

Energy stocks have rallied in recent days as the U.S. dollar came under renewed pressure. While a weaker dollar is helping float energy stocks (and likely the broader market as well), XLE is approaching its next layer of horizontal resistance.

On Tuesday, some large integrated oil stocks like Chevron Corporation (CVX) broke out of tight consolidation zones, which looks to promise more near-term upside.

On the next chart, I plotted the KBW Nasdaq Bank Index (BKX), which represents large banking stocks, with the yield of the 10-year U.S. Treasury note at the bottom.

Click to Enlarge

BKX rallied in recent weeks while bond yields fell. This dynamic of lower interest rates is supporting stocks and will continue to do so… until it doesn’t. BKX is also struggling with a layer of resistance.

Lastly, on the surface, the S&P 500 is holding up, but through a technical lens, the cross of the 50-week moving average (yellow line) below the 100-week moving average (blue line) is a thorn in the market’s side. The past two times this occurred (2001 and 2008), it wasn’t a positive for stocks, to put it mildly.

SPX Chart
Click to Enlarge


Chart chasers around the globe may well be able to score another minor goal and push the S&P 500 into the 2,160 to 2,200 area. However, a sustainable breakout above the 2015 highs remains highly unlikely from a technical perspective, especially taking into consideration the slowing economic and corporate data.

Active investors can trade daily or weekly breakouts such as those we saw in energy stocks on Tuesday, but chasing this market blindly higher remains a low-probability strategy through a multimonth lens.

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.

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