Is The Market Stalling, Reversing Or Resting?

Includes: JNK, OIH, SPY, TLT
by: Northrop Puckett

I would argue that the market is poised to have at least a minor sell-off. It has covered a lot of ground since December and there are some warning signs. There are a few things that could change my opinion about the size and nature of a pullback, but let's consider the following:

In the past quarter, 938 stocks are up over 20% (only 271 down 20%+) and 184 stocks are up over 50% (only 33 down 50%+)! There are also currently 340 stocks trading 30%+ over their 50 day simple moving average. These numbers do help convey the nature of the recent move, and the fact that it has "lifted all boats" so fast may mean a correction is due. Let's evaluate other factors to glean a clearer picture.

RSI on the S&P (SPY) has come down quite a lot on the daily chart, yet the market has gone slightly higher in that time. The 14-period RSI on the daily S&P chart was reading 92 on January 29th. That is overbought and while it can remain overbought for extended periods of time, combined with other factors it is worth noting. Since then it has come down to 65, making lower highs, and creating a divergence.

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The iShares High Yield Bond ETF (JNK) tracks corporate high yield bonds ("junk bonds") and moves when the market is in a "risk on" mood. It has experienced a large drop the past 8 trading days, breaking through its 21 exponential moving average ((NYSEMKT:EMA)) and its 55 EMA. This is the most glaring issue and may be foreshadowing a move in other "risk markets" like the broader stock market. Let's not stop here though.

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The iShares 20 year bond ETF (TLT) generally moves inversely to equities. The bonds are considered "smart money," and have been in a down trending channel for two months now. For me to expect a larger, volatile decline, I would need to see this break through the top of the channel. Until that time I view the chance of a decline below 1490 as less likely. If TLT breaks above the channel line, and S&P breaks below 1490, it brings 1460 into play as support.

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The VIX has been low since the start of January. Generally, we will see a rise in the VIX if the market is going to experience substantial selling. Below is a chart displaying the VIX in a half hour chart (odd time period for me). The 55 EMA has been rising slightly the past week, but it is still low. It would take the VIX reaching a level over 18 for me to start thinking about a large pullback. Even so, the recent rise may be signaling a pullback in the S&P to 1490.

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Energy, particularly the Oil Services ETF (OIH) has been a market leader to start the year. It has stayed above the Tenkan since the start of January, but in the chart we can see it fell below it. That opens up support from the 21 EMA, then the Kijun, then the 55 EMA. The break through the Tenkan could be a sign, but a break through the 21 EMA without a move in the S&P would lead me to believe that the S&P will follow soon after.

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Overall, the market has taken a breather the past few days. I still believe that market inflows are pushing everything up as the money is put to use, but pullbacks are healthy and a move in the S&P to 1490 would not surprise me at all. Frankly, a move to 1450-60 wouldn't surprise me either, and I'd still consider it a healthy pullback. Below that I'd start to get more concerned. Remember, the market often reacts before the picture becomes clear to you and I. Price action may tell us things, if we listen to us.

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.