STOCKS END THE WEEK ON THE DOWNSIDE -- SECTOR ALIGNMENTS SEND WARNING SIGNALS

STOCKS CONTINUE TO WEAKEN... The technical condition of major U.S. stock indexes continues to weaken.  All three shown below lost more ground during the week.    Chart 1 shows the Dow Industrials meeting overhead resistance near their red 200-day moving average.  Chart 2 shows the S&P 500 trading both moving average lines.   Chart 3 shows the Invesco QQQ trust doing the same.  The QQQ has been the weakest of the three indexes because of continued weakness in the technology sector.   The tech sector saw the biggest losses over the past week.    It's also the weakest sector year-t0-date.   Rising bond yields, which hit another three year high, are a big part of the weakness in technology stocks.

SECTOR ALIGNMENTS SEND WARNINGS... While we normally use major stock indexes to gauge the direction of the stock market, sector alignments also tell us a lot about the health of the stock market and the economy.  And those alignments have been sending warning signals.    Chart 4 shows how sectors have done since the start of the year.  The first warning comes from energy being the market's strongest sector year-to-date.   That's a negative warning because energy leadership is usually a late cycle phenomenon which suggests that an economic expansion is nearing completion.   That's because rising energy prices raise inflation concerns which forces the Fed to raise rates which usually leads to an economic recession.   And stocks weaken in anticipation of a possible recession.    There are other warnings as well.

OTHER WARNINGS... One of the other signs that the stock market and the economy are weakening is a rotation into defensive market sectors.   The two other sectors that are still in the black for the year are utilities and consumer staples.   That's where investors usually go when they're turning more bearish.   And a bearish stock market is a warning for the economy.  That's because stocks usually peak well before the start of a recession.   That makes stocks a leading indicator of the economy.  So far, the sector alignments shown in Chart 4 are following the usual intermarket script for a stock market that is peaking and an economy that is heading into contraction.