S&P 500 APPEARS HEADED FOR TEST OF ITS EARLY 2018 LOWS -- THE BREAKING OF ITS THIRTY-MONTH SUPPORT LINE IS ANOTHER NEGATIVE SIGN -- THE LAST TWO MARKET PEAKS STARTED IN OCTOBER -- A PLUNGE IN ASSET MANAGERS MAY BE ANOTHER SIGN OF MARKET WEAKNESS

S&P 500 HEADED FOR A RETEST OF EARLY 2018 LOWS ... I keep hearing on CNBC that stocks are down sharply but "off their lows". They never seem to mention that they're even further "off their highs". After losing nearly 4% over the past week, the S&P 500 ended the week just two points from a six-month closing low and just shy of a -10% correction from its late September peak. The Nasdaq Composite is already in correction territory. As are small and midcap stocks and the transports. Along with energy, materials, industrials, and consumer discretionary stocks. All major stock indexes are trading well below their 200-day moving averages, as are seven individual sectors. [Only four defensive sectors remains above their 200-day lines]. Financials, industrials, and material sectors have already fallen to 52-week lows. Banks and semiconductors have also undercut their 2018 lows. In addition, an index of foreign stocks fell to the lowest level in eighteen months and is within 2% of bear market territory (which is -20%). When a panel of bullish traders was asked on CNBC this week why stocks were falling so hard if the fundamentals were so bullish, two of them said the reason was "psychology". At least that has replaced "technical selling" as the reason for the biggest October drop in ten years. Chart 1 shows the S&P 500 headed toward a likely retest of its February/April lows. What it does from there will determine whether this is just another October scare or something more serious. As I suggested two weeks ago, however, longer range charts are not encouraging.

(click to view a live version of this chart)
Chart 1

S&P 500 BREAKS SUPPORT LINE STARTING IN EARLY 2016... My message from Saturday, October 13 carried the headline that weekly and monthly charts were sending more serious warnings signs. They've gotten even worse since then. The weekly bars in Chart 2 show the thirty-month uptrend in the S&P 500 that started in February 2016 which ended the market's last serious correction. That earlier message showed serious "negative divergences" existing on its weekly RSI and MACD lines which suggested that the 30-month uptrend was peaking. The weekly MACD lines (lower box) are now in danger of undercutting their 2018 lows. That would be a bearish sign. One encouraging sign is that the 9-week RSI line (top box) is entering oversold territory below 30. But that may not be enough to prevent further losses. This week's violation of the uptrend line drawn under its 2016/2018 lows (red circle) weakens that longer range chart even further. And paves the way for a retest of price lows formed earlier this year. Needless to say, that's a very important test. There are those who believe the recent downturn to be just another correction in an ongoing bull market. For that belief to hold, however, so do the lows formed during February and April. Even if that leads to a seasonal rebound during November and December, those same moving averages that have been broken on the downside, may now become resistance barriers above current prices. In other words, any late fourth quarter rebound may present a better selling than a buying opportunity. [Correction: The headline in Chart 2 should read "S&P 500 breaks 30-month support line"].

Chart 2

TWO PRIOR OCTOBER PEAKS ... Since I'm a pretty old guy, and have been following markets for fifty years, I've seen a lot of market peaks. I may not remember all of them, but I do remember the last two. And both of them started during the month of October. I only point this out because I've been hearing a lot about how markets always bottom during October which then leads to a resumption of the market's uptrend. And it may happen again this year. I certainly hope it does. But hope isn't a strategy. In the interest of keeping the record straight, I think it's only fair to point out that not all October drops have been just corrections. Nor have they always led to market bottoms. They sometimes lead to major tops. Like in the next two charts. The daily bars in Chart 3 show the S&P 500 forming a peak in March of 2000 to start a major topping process. The actual top was completed, however, during October when it fell below its summer lows (and violated its 200-day average). That started a bear market that lasted into the end of 2002. Chart 4 shows that the last bull market that started in 2003 peaked in October of 2007 (red circle). That led to a bear market that lasted until the spring of 2009. That doesn't mean that this October has to be the start of another bear market. But if we're going to show the history of past October scares, let's show the bad along with the good. The message I wrote two weeks ago made it pretty clear that I believe the nine-year bull market has probably ended. That could make this the third October peak in the last 18 years.

Chart 3

Chart 4

STOCKS OF ASSET MANAGERS ARE LEADING MARKET LOWER... Chart 5 shows one of the scariest trends in the stock market. The weekly bars show the Dow Jones US Asset Managers Index ($DJUSAG) plunging to the lowest level in two years. Since the start of 2018, the index has dropped -24%. That huge drop dwarfs an -8% drop in the rest of the financial sector, and is twice as bad as the -11% loss in bank stocks. Not to mention its comparison to an S&P 500 index that is basically flat for the year. That terrible relative performance is seen by the Asset Managers/SPX ratio (bottom box) that has fallen to the lowest level since the bull market in stocks began more than nine years ago. That may be important because asset managers often reflect trends in the stock market. A Wall Street Journal article this week suggested that weakness among asset managers may be reflecting investors' waning interest in owning stocks. Smaller stock portfolios produce smaller management fees, which can weaken shares of asset managers. That may explain why money managers and investment advisors keep going on television encouraging us to buy more stocks. Chart 5 shows the index turning up in November of 2016 after an October pullback. This year's chart, however, isn't as encouraging. Any seasonal rebound this year probably won't get too far. That may be true of the market as a whole.

Chart 5