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Is Stock Market Risk Increasing?

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Last week almost ended poorly for the markets, after heavy selling last Thursday. On Thursday at 10 AM ET, advance/decline data showed there were 369 advancing issues and 2684 declining issues on the NYSE. The volume data was similarly one-sided, with 90% of the volume on the downside.

The major averages rebounded to close Thursday well above the day’s lows and the extreme market internals favored a further rebound. At Thursday’s low, the S&P 500 ($SPX) was down 1.6% from Wednesday’s highs, but then Friday closed at a new high up 0.4% for the week.

The selling Thursday was even heavier in the Nasdaq 100 ($NDX), as it was down 2.3% from Wednesday’s high. Even though it was up 0.7% for the week, it closed below Wednesday’s high of 14,891.2.

The decline in bond yields last week got the market’s attention, and the Dow Jones Utility Average benefited, up 1% just behind the 1.2% gain in the SPDR Gold Trust. The Dow Jones Transportation Average and iShares Russell 2000, which were the strongest market averages in the first quarter of 2021, were down 1.3% and 1.2% respectively last week.

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The Utilities Sector Select (XLU) was up 0.91% last week and is looking more interesting technically. XLU has total assets of $11.8 billion, an expense ratio of 0.12%, and a yield of 3.08%. This ETF has 29 equity holdings, with the largest holdings in NextEra Energy (NEE), Duke Energy (DUK), and Southern Co. (SO).

Typically, large money managers avoid utilities. In the June 2021 survey of 224 investors with $667 billion in assets under management, Bank of America reported that the investors reduced their utility holdings for the second month in a row. 

The weekly chart shows that XLU has been in a trading range (lines a and b) for over a year. A close above $66.81 could trigger a rally towards the $70 area. The flat, 20-week exponential moving average (EMA) is at $64.43, with weekly support also in the $63 area.

XLU’s weekly relative performance versus the S&P 500 (RS) is still in a downtrend (line c) and below its weighted moving average (WMA). This confirms that XLU has been weaker than the S&P 500. The weekly On Balance Volume (OBV) has just moved back above its WMA, which is an encouraging sign. A strong close above the resistance (line d) would be a very positive development.

As regular readers know, Advance/Decline data is an important part of my analysis. I follow six different advance/decline (A/D) lines: NYSE All Issues, NYSE Stocks Only, S&P 500, Nasdaq 100, Russell 2000, and Dow Jones Industrials. All except the Russell 2000 made new highs in June with the Nasdaq 100 looking especially strong as it has since March 2016 (see chart).

The weekly A/D lines are positive overall and show no signs of an intermediate-term top. However, there are some signs from the daily data that the stock market is less healthy than it was in early June.

For the week on the NYSE, there were 1488 of issues advancing, and 1977 declining which was consistent with the 0.25% decline in the NYSE Composite for the week. The support for the NYSE is building in the 16,200 area (line a). The NYSE Composite last made a new high on June 10, and that high at 16,726 is now the resistance level to watch.

The NYSE Stocks-Only A/D line peaked in June with prices and then broke its uptrend (line c) from the May lows (point d). The A/D line has since formed a series of lower highs (line b) and last week it dropped below the prior lows.

The number of NYSE Common stocks making new 52-week highs surged to 724 on May 10, and has since formed two lower highs (line e). On Thursday, there were 63 NYSE Common stocks making new lows which was the highest level since the May 10 reading of 100. Several readings of over 100 new NYSE Common stock lows will be a stronger warning of market weakness.

For the month, the iShares Russell 1000 Growth (IWF) is up 0.99%, while the iShares Russell 1000 Value (IWD) is down 0.24%. As I noted in early June, the ratio chart of IWF/IWD looked “a bit more encouraging for the growth stocks”. 

Since the June low of 1.568, the ratio has rallied to 1.753 as growth stocks have led the value stocks. The downtrend in the ratio (line a) was reached last week. There is even stronger resistance in the 1.800 area (line b). The 20-day EMA is rising strongly, with first good support at 1.684 (line c).

The Moving Average Convergence-Divergence (MACD) lines formed higher lows and a positive divergence in May, which was a sign that the ratio was bottoming. The MACD lines are still positive but the MACD-Histogram has formed lower highs (line d), which is consistent with a weakening trend. A decline below the MACD support (line e) would be a sign that the ratio has topped out.

This action may be signaling a change for the financial stocks. The big bank earnings will start to be released on Tuesday, with JPMorgan Chase (JPM) and Goldman Sachs (GS) reporting. It is also a heavy week for economic data, with the bond market focusing on Tuesday’s CPI report and Wednesday’s PPI report. Also next week we get the Empire State Index, Philadelphia Fed Index, Industrial Production, Retail Sales, and Consumer Sentiment.

I continue to favor taking profits on strength and reducing equity exposure as we head into August and September, which since 1950 have been low-return months for the S&P 500. New buying should focus on only buying near very good support and lower risk opportunities until there is a more meaningful correction. Longer-term investors should just stay with existing holdings, as a deeper correction is likely to be followed by new highs.