S&P 500 Stocks Remain on the Fence, But Are Itchin’ to Get Off It

As quickly as the recovery effort materialized on Monday, it faded on Tuesday, well short of the key hurdle the bulls needed to clear to reignite the bigger-picture rally. On the other hand, it’s not like the bears did any real damage either. The S&P 500 finished yesterday’s action squarely between support and resistance, still waiting for traders to muster some conviction.

On Tuesday, the S&P 500 lost 6.82 points, or 0.29%, to close at 2,342.19. Not every sector got hit. Noncyclicals/consumer staples were up 0.59% for the session, led by the 24.7% gain GNC Holdings Inc (NYSE:GNC) mustered following a nice earnings beat.

That wasn’t enough to offset everything else though. In fact, every other group was in the red. Healthcare stocks led the bearish charge with its 0.93% setback. Johnson & Johnson (NYSE:JNJ) was out in front of that parade with its 3.1% tumble. J&J’s first-quarter revenue shortfall made it an easy target.

Steady (albeit not thrilling) capacity utilization and industrial productivity numbers for March weren’t enough to stave off the selling. Investors were just too concerned about a handful of earnings disappointments, presuming they were an omen of what to expect for the rest of earnings season.

Although the market’s back wasn’t broken, the undertow was a little more bearish than it superficially seemed on Tuesday … at least for the NYSE. For the Big Board, 61% of its volume was selling, and 37% of its trading volume was bullish. Decliners outpaced advancers at a rate of 50%/46% (meaning 5% of the NYSE’s issues were stagnant for the day).

The Nasdaq’s internals were even more balanced, at least in terms of volume. For that sliver of stocks, 49% of the volume was down, and 49% of it was up. There were considerably more falling stocks than rising stocks on the Nasdaq though. Decliners outpaced advancers at a rate of 1.3 to 1.0. The Nasdaq Composite ended the day at 5,849.47, down 7.32 points, or 0.12% lower.

In all cases, however, Tuesday’s total volume was greater than Monday’s volume, when stocks were on the rise. The bears are slightly more interested in selling then the bulls are in buying. The bears are hardly in firm control though.

As was mentioned yesterday, at the very least the S&P 500 needs to fight its way back above the 20-day moving average line and the 50-day moving average line (they’re at the same level now) to entertain the idea of a bullish rebound.

That didn’t happen. Indeed, the buying effort faded as soon as Monday’s highs were about to be tested. On the flipside, the S&P 500 didn’t break under a semi-important floor at 2,322.25, where it hit a low last month. Instead, the index remains trapped between a rock and a hard place. That’s not exactly something traders are unfamiliar with.

S&P 500 Daily Chart
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Stocks Remain on the Fence, But Are Itchin' to Get Off It

The M.O. here is the same as before. That is, the S&P 500 needs to break out of this short-term range before we can afford to come to any conclusions about the near-term future.

Also in Monday’s analysis, we discussed the Russell 2000 as a key barometer for stocks. In that they tend to lead the broad market higher and lower, we were going to keep a close eye on that index. A break below support at 1,341.3 would be the warning of a breakdown.

Not only did we not see that happen either, interestingly, small caps were up a tiny percent yesterday. It doesn’t exactly scream “Worry!” Those lines in the sand still apply. Just in the interest of getting as many looks as possible on the table though, today’s proverbial second opinion comes from the daily chart of the Dow Jones Industrial Average. It’s not a complicated look. In fact, it’s nearly identical to the S&P 500 in terms of shape and direction. It’s just of interest because its absolute floor at 20,449 is arguably the best-defined support level for any index right now. If it breaks down along with the S&P 500 (and/or the Russell 2000), that’s apt to trigger a more meaningful correction.

Dow Jones Industrial Average Daily Chart
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Conclusion? This is still a ‘wait and see’ situation, though we’re near an end to that wait. The bears are going to have to put up or shut up soon. Ditto for the bulls.

The wild card is still the VIX. It’s not only aching to slide lower, it IS sliding lower, with plenty of room to keep doing so. That falling VIX has the potential to set up a bullish thrust for stocks, and though it may be undeserved fundamentally speaking, any cross back above the 20-day moving average lines for indices could be met with a wave of buying. Traders have been rationalizing some pretty crazy bullish cases of late. You still don’t want to fight that tape.

First things first though. Let’s just wait and see which side flinches first here, and lets stocks cross the aforementioned lines in the sand.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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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