Market Warning Signs: A Cautionary Tale
As we navigate the current market landscape, it’s essential to acknowledge the warning signs that suggest a potential downturn. While the major averages remain near their all-time highs, the underlying technical indicators are flashing yellow.
Short-Term Damage Accumulates
The S&P 500 (SPX) has slipped below its 50-day average, a key support level. Furthermore, the five-day/13-day exponential moving average (EMA) crossover remains on a sell signal, indicating a bearish trend. The 21-day rate-of-change (ROC) has also dipped into negative territory, adding to the growing list of concerns. Additionally, the SPX is trading below its middle daily Bollinger Band, a sign of increased volatility.
Bearish Momentum Divergences Emerge
The SPX has formed two weekly and two monthly bearish momentum divergences, a rare and ominous occurrence. The weekly divergences date back to early 2024, while the monthly divergences stretch back to 2018. Historically, such prolonged monthly divergences have preceded significant market corrections, as seen in the period from May 1996 to August 2000. The weekly Coppock Curve has also formed a bearish divergence, a phenomenon last observed in the late 2020/late 2021 period, which ultimately ended in a market downturn.
Breadth Weakness Exposed
The market’s underlying breadth is deteriorating, with many stocks failing to participate in the recent rallies. This lack of participation is a telltale sign of a weakening market, and it’s essential to take heed of these warning signs before it’s too late.
A Prudent Approach
In light of these technical indicators, it’s crucial to adopt a cautious stance in the intermediate term. While the market has not yet shown significant long-term damage, the accumulation of short-term damage warrants a yellow flag. As investors, it’s essential to remain vigilant and adjust our strategies accordingly to navigate the potentially treacherous market landscape ahead.
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