Weekly Update: The Stock Market Is Showing Red Flags
Good evening, and welcome to this week’s edition of Stealth Trades!
The foundation of the stock market continues to weaken.
Despite the S%P 500 sitting just 1-2% below all-time highs, there are clear and alarming cracks in the foundation. Nearly every breadth indicator I am monitoring shows deteriorating conditions, and an index being propped up by a shorter and shorter list of names.
As of this morning, stocks have made more new lows than highs for 28 straight trading days.
Right now, half of all stocks in the index are in long-term downtrends.
Only 52% are trading above their 200-day moving average.
We are seeing improvement here, however, rising from 40% at the start of the month. And the % above their 50-day average has climbed from 20% to 44%.
So, there’s hope of a recovery, but I still need to see more.
The advance decline line shown below in yellow tells a similar story of improvement but still lagging healthy levels.
I have also been working on a new liquidity model that is still being tweaked. It shows similar near-term improvement, but we are still on the wrong side of capital flows.
But the only evidence that really matters is how well trades are working.
Two weeks ago, I highlighted the photonics sector and the setups forming across several stocks in the group.
Every one of those setups failed.
That’s my feedback. Breakouts aren’t running, bases are failing, and participation remains weak.
The main stocks holding this market up today are Apple (AAPL), Microsoft (MSFT) and Meta (META). If any of those breaks down, it will be difficult for the index to remain near its highs.
Further evidence of failing leadership can be seen in our Industry Strength indicator.
Over the last 30 days, the top performers are retail, entertainment, basic materials – groups that have not led at any point this year.
Basic materials and consumer staples are typically safety groups – places scared money goes to hide.
A strong market sees money flowing to risk assets. A weaker one seeks safety.
Hopefully, this is nothing more than a short-term correction to knock the froth off the market, push the leverage out of the big growth names, and set up the next big run higher.
This would be both normal and healthy.
But right now, I am keeping risk low. I am trading less, in smaller sizes, and only looking for A1 setups. If the trade doesn’t look perfect, I am not taking it.
Markets move fast. Conditions could improve quickly, especially if interest rates come down, we get a resolution in Iran, energy prices subside, and the odds of a rate hike come down.
But it is important, as traders, to identify when conditions are primed and when they are not. Right now, they are not.
Join me in Monday’s YouTube LIVE session at 9am ET. We will dive into this deeper and look for new opportunities.
Best wishes for your trading,
Ross Givens
Editor, Stealth Trades