Look Out Below: The Average Stock is Falling
Thanks to a few strong stocks, major indexes are holding on, but the average stock is already in decline.
By Michael Kahn
June 8, 2015 4:13 p.m. ET
I find it amazing how the stock market can look quite solid one day and then systematically get dismantled without most people really noticing. Only 11 trading days ago the Standard & Poor’s 500 printed a record high, but it has been all downhill from there. And although the major indexes have not suffered any significant technical damage, the average stock is not so lucky.
From simple observation of the performance of small stocks to the more arcane advance-decline line, it is starting to look as if something slightly wicked this way comes. I’m not suggesting investors stuff the mattress with cash, but it may be time to reduce risk.
The S&P 500 still has a series of higher highs and lower lows intact (see Chart 1). That is the basic definition of a bullish trend, so it is hard to make an argument for anything else. And even if that trend ends, there is ample support on the charts between 2040 and 2060, thanks to the March lows and the 200-day moving average (the index traded at 2085 Monday).
From simple observation of the performance of small stocks to the more arcane advance-decline line, it is starting to look as if something slightly wicked this way comes. I’m not suggesting investors stuff the mattress with cash, but it may be time to reduce risk.
The S&P 500 still has a series of higher highs and lower lows intact (see Chart 1). That is the basic definition of a bullish trend, so it is hard to make an argument for anything else. And even if that trend ends, there is ample support on the charts between 2040 and 2060, thanks to the March lows and the 200-day moving average (the index traded at 2085 Monday).
Chart 1
Standard & Poor’s 500
But the S&P 500 tracks big stocks, and is capitalization weighted. The bigger the stock the more it counts, and that can mask small stock weakness. Tech behemoths such as Apple and banking giants such as JP Morgan Chase are indeed doing a lot of the heavy lifting. To combat this problem, I like to look at the New York Stock Exchange composite index as the champion of the average stock. True, it still does favor larger stocks, and it includes non-domestic stocks such as bond funds and foreign shares, but the sheer number of issues contained dilutes their effects.
Warts and all, the NYSE composite gives me another angle on market breadth. And right now, it has moved below short-term trendlines drawn from the October 2014 closing low (see Chart 2).
Chart 2
NYSE CompositeBull markets usually do not end with a clear continental divide between bull and bear trends. Market tops happen slowly, as group after group runs out of juice and starts to retreat.
The sector that recently got my attention was consumer staples. This is a defensive area that usually outperforms the market in times of uncertainty, thanks to the steady nature of the businesses of the stocks within. When times are hard, consumers are more likely to forego a car or DVR purchase than food or aspirin.
That is why it is a great surprise, from the technical point of view, to see the Select Sector SPDR Consumer Products exchange-traded fund ) as one of the worst performers over the past month. It was second only to energy and utilities, and those two have bigger problems than just a shaky stock market.
It could be a sympathy move with the bond market, as many stocks tracked by the ETF sport generous dividend yields. Or, it could be that prices were driven up too far by investors piling into these stocks in search of the stability – or income – they are supposed to offer.
Whatever the reason, this is yet another sector that looks to have seen its better days. Indeed, the chart now shows a breakdown below a six-month trading range and dip below the key 200-day moving average (see Chart 3).
Chart 3
SPDR Consumer Staples ETFAs I wrote here last month, selling at the start of the summer months may not be a viable money maker – or even money conserver – but it has saved a lot of volatility headaches over the past several years (see Getting Technical, Sell in May Is Dead, May 20). With so much of the stock market looking worse than the major averages, it really does feel like time to lighten up just in case a volatile summer turns into a bearish autumn.
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.
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