As the potential Sell in May and Go Away influence approaches, problems for the stock market are stacking up from both the fundamental and technical sides.
On the fundamental side;
· New home sales fell 4.6% in February, the biggest decline in two years.
· Durable Goods Orders ex-aircraft orders fell 2.7% in February.
· The Conference Board's Consumer Confidence Index unexpectedly plunged from 68.0 in February to 59.7 in March.
· The Thomson Reuters/University of Michigan Consumer Sentiment Index plunged to a nine-month low in April.
· The ISM Mfg Index unexpectedly dropped from 54.2 in February to 51.3 in March, its third straight monthly decline. The ISM Non-Mfg Index, covering the services sector, also declined in March.
· Retail Sales fell 0.4% in March, the biggest decline in 9 months.
· Only 88,000 new jobs were created in March, much worse than the forecast for 200,000 jobs.
This week we learned that the Conference Board's Leading Economic Indicators fell 0.1% in March versus the consensus forecast for an increase of 0.2%.
And while overall housing starts were up in March, single-family home starts fell 5.0%, and permits for futures starts fell 3.9%.
Meanwhile, the economic problems are being confirmed by commodity prices, including the price of oil. Declining commodity prices usually indicate demand for goods is dropping and the economy is in trouble.
For instance, the CRB Index of Commodity Prices fell 15% in the summer of 2010 and the S&P 500 fell 15% in that summer's correction. In 2011, the CRB Index fell 15% and the S&P declined 19.5% in that summer correction. Last year the CRB Index fell again, and the S&P 500 fell 11% in its correction to the early June low.
So it's not comforting that even as the Dow and S&P 500 have been making new highs this spring, the CRB Index is already down 11.5% from its last peak and making lower highs on its rally attempts and lower lows on the pullbacks - no bottom in sight yet.
On the technical side there is a negative divergence shaping up between the Dow and the DJ Transportation Average, and between the blue chips of the S&P 500 and the small stock Russell 2000 Index. The Dow and S&P 500 remain near recent highs and comfortably above their 50-day moving averages, while the Transportation Index and Russell 2000 Index have both come down from their March highs and broken beneath the previous support at their 50-day moving averages.
Meanwhile global markets tend to move pretty much in tandem with each other, and an even more ominous divergence has been in place for a while between the resilient U.S. market and numerous important global markets, on which technical indicators triggered sell signals a month or more ago. They include Brazil, China, Hong Kong, India and Russia, which are already down an average of 12% from their recent peaks.
Even the largest and strongest stock market of Europe, Germany, which had been making new highs right along with the Dow, has been in a correction over the last few weeks, now down 7%, with short-term support levels broken and looking like more downside ahead.
As the old saying goes, the market does like to climb a wall of worry.
But with the economy stumbling again as it has in each of the last three summers, commodity prices tumbling, and important global markets giving up, it's no time to be made complacent about the U.S. market by its continuing resilience, which seems to now be on shaky underpinnings.
In fact, investors should be preparing for the potential that downside positioning may become the way to go before long.