It looks like the stock market is finally coming unglued.
And ironically, and just as I suspected, it’s unfolding right at the start of what is usually a seasonally strong period for markets … but not this year.
So far, the selloff in the broad U.S. markets has been limited to less than 2%. But I suspect this is just the beginning of more downside ahead, for several reasons.
First, it’s a global selloff. Markets in Asia and Europe have also been rocked, with the Euro STOXX 50 Index down nearly 4% at this week’s low. Likewise, Japan lost 4% and South Korea dropped over 3%, before a half-hearted rebound.
Remember, overseas markets have led the stock market rally all year. Europe is up 22% this year while Japan jumped 20%, compared with a gain of just 15% for the S&P 500 Index. Now global markets are leading again … to the downside!
Second, market breadth looks terrible and is rapidly deteriorating. As you can see in the chart above, the percentage of stocks in the S&P 500 that are trading above their 50-day moving average has rapidly declined to just 57% today, down from 77% just a few weeks ago.
That means nearly HALF of all stocks in the index are trending lower. Worse, more than one-third of the S&P stocks have fallen below their 200-day moving average, which means hundreds of blue-chip stocks are already in their own private bear market!
The fact is, it’s just a handful of the mega-cap FAANG stocks that are holding up this market, and they can’t prop up the index forever.
Third, as shown in the chart above, volatility is on the rise, which strongly suggests a continued spike higher. On top of the technical damage that’s been done to the markets, there are plenty of outside risk factors, as I pointed out last week, that could easily trigger a much steeper slide in stocks, triggering a massive liquidation in this overbought and overvalued market.
After all, it’s been a good year for index-hugging fund managers with the S&P up 15% year-to-date. So, there’s a strong temptation for these guys to bag profits for 2017 and then rush to the sidelines for the holidays. That leaves stocks vulnerable with more marginal sellers than buyers.
Bottom line: Stocks look set to slide lower in the weeks ahead. It may not morph into a meltdown ala 2008, but the market is vulnerable to more than just a 3% correction.
After all, we haven’t had a correction in a very long time, which strongly suggest there are plenty of complacent investors with itchy trigger fingers who can feed the selling. You’re positioned on the short side, too early as it turns out. But now is the time to stay the course to see how low stocks can go for the holidays. Continue to hold all open positions and stay tuned for more updates.
Good investing,
Mike
