Heads Up, Clouds Forming The Market

Includes: C, FDO, GS, INTC, JNJ, JPM, KHC, PG, WMT
by: George Kesarios

Several days ago Wal-Mart (NYSE:WMT) reported a surprise decline in quarterly same-store sales in the U.S. Higher taxes and gasoline prices were named as the culprit. More important however, Wal-Mart cut its revenue and profit forecast for its fiscal year, raising concerns about retail spending in its key markets. Wal-Mart now expects sales to be up between 2%-3% for the fiscal year, down from an earlier forecast of a rise of 5%-6%. Wal-Mart is followed very close by many analysts, for it is a barometer for retail spending worldwide.

Reuters reported that China and Japan "led an exodus" from U.S. Treasuries in June. Data showed they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries. This was the fifth straight month of outflows and the largest since August 2007. The culprit is the fact that the Fed might begin unwinding its stimulus. Early bird gets the worm, or in this case, early sellers of treasuries lose less. Brian Wesbury, Chief Economist of First Trust, said if you bought a fresh minted 10-year note last year, you are already incurring about a 10% capital loss on you initial investment.

Another troubling sign is that many billionaires are quietly dumping their U.S. Shares these days. Warren Buffet citing "disappointing performance" has been selling Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG), and Kraft Foods (KRFT). According to filings, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) sold 19 million shares of Johnson & Johnson and sold its entire stake in Intel (NASDAQ:INTC).

John Paulson's hedge fund, Paulson & Co., dumped 14 million shares of JPMorgan Chase (NYSE:JPM), and sold its entire position in discount Family Dollar (NYSE:FDO). Also quietly dumping shares is George Soros, who has sold off nearly all of his bank stocks, including JPMorgan Chase, Citigroup (NYSE:C), and Goldman Sachs (NYSE:GS).

As to why they are selling is not as important as the fact that they are doing so. And it might be wise for investors to keep note of what they are doing, because you don't get where they are if your market intuition is wrong.

I want to point to another troubling sign that I have noticed, that is not very apparent. Please look at the chart below.

(Click to enlarge)

This chart shows us the percentage of stocks in the S&P500 index that are above their 200 moving average. This is not exactly a technical analysis chart, but it does give us clues as to what is going on in the market.

As you can see, the indicator is in a free-fall lately. I admit that this index at 78% is not very troublesome, but if this indicator falls below 60%, then you will be seeing a lot signs of trouble in the market. If however this indicator falls below 50%, then things will really get ugly.

One of the reasons why I like to keep tabs on this indicator is because it gives us a picture of the market unlike classical technical analysis charts. It actually tells us where the market is going, without looking at the price action.

The logic (as I see it) is if enough stocks fall below their 200 day moving average, their long term uptrend is over, because the 200 day moving average is a good indicator of the long term uptrend. So when more than 50% of the stocks that comprise the index are no longer in a long term uptrend, it means it's time to sell, because no money will be made.

Bottom line

More and more stocks are falling below their 200 day moving average, which means that more and more stocks are giving up their longer term uptrend. Be on alert if the indicators falls below 50%.

Coupled with the fact that a lot of smart people are unloading shares very quietly these days (for whatever reason), is probably a sign to be extra careful for a market nosedive. Because if anything, the market does not warn when diving, it does so and gives an explanation afterwards. So being on alert is always profitable.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.