Stocks are slipping lower again on Wednesday with the NYSE Composite meeting resistance at its 200-day moving average — the same level that stymied the bulls back in June. So is the rally that took stocks up 11.6% from the July 1 low over? Or is this just a typical short-term correction in the context of a medium term rally?
With various indicators now at overbought levels, the latter seems more likely. Just look at this: The percentage of stocks above their 10-day moving average swelled to 87% on Tuesday from a low of 3.5% on July 1.
Indeed, there was plenty of evidence over the last two days that buyers were beginning to feel fatigued. Volume increased 18% on the NYSE on Tuesday over Monday’s session — suggesting that increased selling pressure is overwhelming demand. Smaller riskier stocks badly lagged their larger, safer brethren. Breadth has deteriorated. Commodities slipped lower, with crude oil losing nearly 3%.
Energy and materials stocks look particularly weak right now. Energy remains trapped in its post-April downtrend as it bonks its head on trend line resistance. The short-term stochastic on the Energy SPDR (NYSE: XLE) is rolling over, suggesting weakness ahead.
The only sector groups that got any traction were the defensive, non-cyclicals groups. These include utilities, consumer staples, and health care. In fact, the iShares Utilities (NYSE: IDU
) pushed to a new high. Frequent readers should be well positioned, since I’ve recommended utility stocks in prior posts here and here. They should continue to do well as nervous investors seek the safety and attractive dividend yields the sector provides.
Over the intermediate-term, the situation still looks promising. There is plenty of good news to support higher prices over the horizon. Company sales surveys conducted by the ISI Group rose by the largest amount in four months last week. Job gains look set to continue into the second half of the year. Business confidence is up in Germany. Employment is rising at a 3% annual rate in Taiwan. And exports are surging in Japan and South Korea.
Technically, medium-term measures of breadth remain very strong — as you can see in the chart above. The NYSE Composite, shown in cumulative form in the chart above, has also moved above its June high and is now challenging its April high. This positive divergence with the underlying stock index suggests higher prices are ahead.
The takeaway: The S&P 500 should be good for at least a run to resistance near 1,175, or a 5%+ move from here before another significant selloff materializes.
