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I wrote about the market conditions two weeks ago, and said that we might be experiencing the beginning of a correction. The market largely ignored the current conditions and the S&P 500 (SPY) marched on to new highs. But the inter-market behavior is still not favoring risk on behavior, and the economic data coming out is weak and mostly below expectations.

Weak economic data

In the latest economic data reported, non-farm payrolls were very weak and below analyst consensus estimates, retail sales are down and below estimates, Empire State manufacturing index and Michigan consumer confidence were also lower. The NAHB housing market index is at its six-month low of 42, sliding two points in the latest report.

Gold (GLD) and silver (SLV) also broke down to their lowest levels in two years, as fear that Cyprus and possibly other European nations might sell their gold to finance their deficits. China's first-quarter GDP also came in lower than expected, as the growth slowed down to 7.7%, and the consensus estimates called for an 8% rise. In addition to weaker GDP growth, industrial production grew 9.5%, down from 10% in Q1 2012. Retail sales rose 12.4%, also down from 14.3% a year ago. The news added to the overall negative sentiment in the markets, and especially in the precious metals.

Defensiveness in the market prevails

It is usually not good for the general market if the defensive parts outperform the broad indexes. And that is happening for some time now, although the S&P 500 managed to reach new highs recently. Bonds (TLT) and utilities (XLU) continue to go higher and outperform the S&P 500, while small caps (IWM) and homebuilders (XHB) faced a fierce sell-off. I wrote about the Homebuilders and their topping process two months ago, and they haven't made much progress since, and have experienced distribution and little overall price progress.

On the charts below, you can see the price progress of defensive asset classes and their performance relative to the S&P 500 on the line chart below the price chart. The move of the line higher represents the outperformance of the chosen asset class relative to the S&P 500, and the reverse is true for the lower move of the line, and it means the asset class is underperforming the S&P 500. The utilities (XLU) are in a steep uptrend, and have outperformed the S&P 500 since early March. Bonds (TLT) are moving up for a month now, and started to outperform the S&P 500 again.

(click to enlarge)

(click to enlarge)

Source: Stockcharts

On the other hand, homebuilders have topped in mid-March and underperformed the broad market since. The index sliced the 50-day moving average line for the second time in above-average volume, and did not manage to reach new highs although the S&P 500 did. The Russell 2000 also topped in mid-March, and did not manage to reach new highs since. It too dropped below the 50-day moving average line, and the volume was highest in three months.

(click to enlarge)

(click to enlarge)

Source: Stockcharts

Conclusion

Weak economic data and poor intermarket behavior point to the elevated risk of an intermediate correction. With the indexes near all-time highs, and an already mature uptrend in its sixth month, a correction would not be that surprising. Defensive attitude is advised until the conditions improve.

Source: More Evidence That The Market Is In Trouble