S&P 500 Trading Update: 7 Reasons For Caution

S&P 500 Short-Term Trading Outlook (2-3 Days):  BEARISH

I’m seeing signs of a minor pullback underway here in early November for the S&P 500 (INDEXSP:.INX).  BUT, we’ll need a break of 2562 on futures for any real concern to mount.

Prices got up to 2590-2 and reversed, with weakness in Financials (NYSEARCA:XLF), small-caps, and high yield bonds (NYSEARCA:JNK) – these are important parts of the market. Any pullback to new 3-day lows would be thought to be important and negative.  More on this further below.

Chart Spotlight: S&P 500 Futures Hourly Chart

The short-term uptrend from late October to early November shows areas of importance at 2576, then 2562 on the downside.

TECHNICAL THOUGHTS

Increasingly I am beginning to see additional signals emerge that typically cause concern for stocks, and this goes above and beyond the typical rhetoric regarding deteriorating breadth and momentum. Let’s list these quickly and then explain:

1)  Junk Bonds (JNK) are down to the lowest levels since late August. This is divergent price action to equities as the S&P 500 has been higher the last eight weeks in a row.

2)  Financials (XLF) have rolled over to violate the lows of the last 12 trading days, making the lowest close since late October.

3)  Yields and stocks have diverged from their normal rhythm, with both bonds and stocks moving in tandem, something that’s been a real rarity in recent years.

4)  Utilities and Consumer Staples both outperformed sharply yesterday, while Consumer Discretionary was a drag.

5)  Small-caps and Mid-caps stock shave begun to turn down sharply, both on an daily absolute and relative basis.

6)  Equal-weight indices like SPX, NDX have dropped to the lowest levels since early 2016.

7)  Demark signals now aligning on Daily AND Weekly basis for SPX, NDX, BWORLD index, SX5E index, and weekly sells on TNX confirmed last week.

Many of these seven concerns have nothing to do with the original reasons for skepticism regarding this rally’s longevity, laid out a month ago.  Sentiment, deteriorating momentum and breadth, Seasonality, cycles, and Demark, of which none have been all that effective for the indices themselves.   Now we’re beginning to see the high yield spreads widening out, which IS typically one of the precursors to a stock market decline, while Financials which account for 13% of the market, just dropped to multi-week lows.  The Defensive outperformance is also a key piece to the puzzle and could be starting up , so this also should be watched carefully.

For now, it’s right to favor strength in Japan, looking to buy weakness, along with being long the US Dollar, Long Treasuries and overweight the defensive sectors which look to rebound in the coming weeks.

While the track record post US indices making 8 week gains is enviable, and quite bullish on average going back since 1900 on a 1, 3, 6, 12 month basis, this likely just postpones the larger pullback until next year.   But these issues listed above are very real and historically have been solid reasons to adopt a more cautious tone.  We’ll see if they matter this week. 2562 remains the first line in the sand for SPX futures.

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Author has positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.