The Stock Market’s Tone Is Changing: Are You Prepared?
Key Takeaways
- Short-term weakness and sector rotation are showing up in the charts, but the longer-term trend remains intact.
- Money is rotating into areas like Utilities and Consumer Staples.
- Early warning signs are worth monitoring so you can plan ahead.
It wasn’t the most exciting week for stocks.
If you’ve been watching the stock market, you may have noticed that the stock market’s narrative hasn’t changed much. The S&P 500 ($SPX), Nasdaq Composite ($COMPQ), and Dow Jones Industrial Average ($INDU) continue to consolidate. There were times when things looked like they might break out to the upside, but nothing materialized.
Overall, stocks were weak, while precious metals, oil, and bond prices climbed higher. Investors are feeling nervous about potential geopolitical tensions, which may explain why the focus has shifted to a risk-off sentiment.
Looking at a weekly chart of the S&P 500, the index is still trading above its 40-week Simple Moving Average (SMA). However, it has flattened out and is drifting slightly lower.
The consolidation is more obvious in the daily chart (see below). The S&P 500 is displaying a series of lower highs, it closed below its 50-day SMA, and the 21-day EMA has crossed below it (see zoom thumbnail).
Tech stocks took a huge hit this week, especially software stocks. The pain is also being felt in the Financials sector. For the week, it was the weakest sector performer, with Technology coming in second-weakest.
The chart of the Financial Select Sector SPDR Fund (XLF) shows that the ETF has fallen below its 200-day SMA, with its one-year performance relative to the S&P 500 sitting at -14.03%. Its momentum is weakening, as seen in the Relative Strength Index (RSI) in the lower panel.
There have been some rumblings about softening confidence in the private credit space. It could develop into something bigger but, at this stage, the charts are flashing early signals rather than alarms.
We’ve also seen a notable shift into defensive stocks. The offense vs. defense charts in our Market Summary page paint a clear picture. Consumer Discretionary is underperforming Consumer Staples.
In addition, Technology is underperforming Utilities.
On the Bright Side
It’s not all bad news. The S&P 500 Equal-Weighted Index ($SPXEW) been gaining relative strength versus the cap-weighted S&P 500.
The Cboe Volatility Index ($VIX) closed at 19.86 on Friday, which is nowhere close to levels of panic or extreme fear.
Bottom Line
It’s not time for investors to panic. The charts presented here are early signs of a shifting stock market landscape. They may not lead to further weakness, but investors should have an exit plan ready in case the early caution signals turn into red flags.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
