STOCK PULLBACK CONTINUES -- ALL MAJOR STOCK INDEXES ARE BACK BELOW LAST YEAR'S PEAK -- MOVING AVERAGE LINES ARE BEING TESTED -- ENERGY, MATERIALS, AND INDUSTRIALS ARE AMONG BIGGEST SECTOR LOSERS
MAJOR STOCK INDEXES LOSE MORE GROUND ... The stock market pullback that started yesterday is continuing again today. And all three major stock indexes appear headed for a test of underlying moving average lines. First and foremost, it's where this pullback is starting from that's most concerning. Which is the previous high established last year between August and October. All three major stock indexes are back below that previous peak. In chartwork, retests of previous important peaks are always a little dangerous. Especially after the steep price runup that's been seen during the first four months of this year. Some short-term indicators are also looking a little toppy. And, for the first time this year, volatility is climbing (more on that shortly).
STOCK INDEXES BACK OFF FROM OLD PEAK... Chart 1 shows the S&P 500 trading back below its September peak at 2940 after exceeding it last week. This week's pullback below that peak calls that short-lived breakout into question. The SPX is also trading below its 20-day average (green line) for the first time since March which sets up a likely test of its blue 50-day line. That's a more important test. Its 14-day RSI line (top box) is in danger of slipping below its 50 line; and MACD lines (middle box) have turned negative. Chart 2 shows the Nasdaq Composite Index also trading back below last year's peak and in a similar situation. Chart 3 shows the Dow Industrials in danger of closing below its 50-day line for the first time since January. The Dow was the only one of the three major stock indexes that failed to clear last year's high. Which also makes this a likely spot for some profit-taking to appear.
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Chart 1
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Chart 2
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Chart 3
INDUSTRIALS, MATERIALS, AND ENERGY WEAKEN ... Although all eleven stock sectors are in the red today, those more closely tied to global trade are being hit harder than others. Chart 4 shows the Industrial Sector SPDR (XLI) bearing down on its 50-day average. Boeing (BA) and some transportation stocks are weighing on the XLI, which also failed to clear its September high. Stocks tied to commodities are also under more pressure. Chart 5 shows the Materials SPDR (XLB) retesting its 200-day line. The XLB is being pulled down by chemical stocks, as well as those tied to industrial metals. Energy remains the market's weakest sector. Chart 6 shows the Energy SPDR (XLE) moving further below its 200-day average. A stronger dollar is also pushing most commodity prices lower today. Except for safe haven gold which is modestly higher. Technology is the day's weakest sector with heavier selling in stocks tied to trade with China. Especially semiconductors which are the tech sector's weakest group.
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Chart 4
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Chart 5
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Chart 6
VIX REACHES FOUR-MONTH HIGH ... Chart 7 shows the Volatility Index ($VIX) rising to 20 today which is the highest level since January. This week has provided the first rise in the VIX since its peak in late December which marked the end of the fourth quarter selloff and start of this year's impressive stock rally. A rising VIX is usually associated with weaker stock prices. A convincing move above 20 would be a more negative sign for stocks, and would suggest that the second quarter of the year will see more volatility than during the first quarter. That's not necessarily a bad thing. The first quarter rally was unusually fast and steep, with barely a pullback along the way. And it regained all of the losses suffered during last year's final quarter. That seems like a logical spot for stock indexes to retrace some of those first quarter gains. That might also serve to work off some of the short-term excesses reached during the first quarter. Seasonal trends also start to turn less friendly during the month of May.
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Chart 7
WORLD INDEX IS ALSO BACKING OFF FROM RESISTANCE... This week's stock selling is global in scope. The weekly bars in Chart 8 show the MSCI All Country World iShares (ACWI) pulling back from chart resistance formed last September. That's a logical spot for some profit-taking to appear. In addition, its 9-week RSI line (upper box) is backing off from overbought territory at 70. Moving average trends remain positive. But its 10-week average (blue line) is being tested. A close below that initial support line could signal a deeper pullback. The ACWI includes stocks in the U.S. as well as foreign developed and emerging markets.
