Stocks have declined and market breadth has continued to deteriorate over the past month.
The S&P 500 is at a critical level sitting right at support being provided by the September highs and a rising 50-day moving average line. $4,500 is a very important level. If price breaks decisively below this level it would have bearish implications for the broader stock market.
Mid, Small, And Micro Cap Indexes
What are the other market capitalization stock indexes suggesting about internal market health and thus market risk?
In summary, they are all weaker than the S&P 500. All these indexes are at key levels and if the market has any hope of advancing strongly, these indexes must not break down.
Below is a chart of the Equally Weighted S&P 500, Mid-Cap Index, Small-Cap Index, and Micro-Cap Index. The red line in each chart is that indexes 200-day moving average.
All of them are weaker than the S&P 500. First, the Equally Weighted S&P 500 has fallen below its September high (support) and that level is now resistance.
The Mid Cap index has consolidated since May and is sitting slightly above its 200-day moving average. If it falls below this average and the support level just below it, that would be bearish.
Small Caps look worse. This index is below its 200-day moving average and sitting right above major support which has held for most of this year. The break below the 200-day moving average is bearish and a decisive break below support would be very bearish for the broader market.
And worse yet is the Micro Cap index decisively breaking below its moving average and teetering right on major support.
Market breadth has continued to deteriorate. Below is a chart of the S&P 500 Summation Index.
It has been trending lower since May while the S&P 500 has trended higher. This suggests that while the index has trended higher, the number of stocks that are within the index are not doing as well.
The Bottom Line
Market internals have weakened and major market indexes are all sitting at very important areas of support. If they fall below these levels, things could get ugly.
Market breadth continues to be a problem.
Another negative factor that I am watching is bond yields. The yield curve is narrowing and yields have begun to fall. If this continues it would be bearish for the stock market.
In summary, the market needs to hold above current levels. If it doesn’t, things are going to get interesting.
Client Account Update
It is important to calibrate the risk you take in your investment accounts based on the underlying risk in the market. Currently, I view market conditions as being poor in the near term and even worse if we see any further market weakness.
Because of elevated market risk, client accounts are allocated conservatively. The bond portion of our portfolios are fully allocated and our equity exposure is allocated to benefit from near-term market weakness.
If stocks can gain some traction here and advance strongly it would be bullish and a reason to increase our equity exposure.
As always, we monitor market conditions daily and look to protect our clients from losses during times of major stock and bond market stress.
If you have any questions, please feel free to send me an email.
Craig Thompson, ChFC
Email: [email protected]
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
Asset Solutions may discuss and display, charts, graphs, formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Most data and charts are provided by www.stockcharts.com.
Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
All charts provided by: StockCharts.com