If all you did was look at the price trends of the major indices, you would assume there is not much drama playing out in the market. However, when you look under the hood, you begin to see signs of deterioration. Identifying that deterioration early is the difference between providing real risk management and simply driving down the beta highway.
S&P 500 and NASDAQ 100
As I wrote above, there isn't much here to concern or excite anyone. We continue to see consolidations within the context of ongoing uptrends above rising 60-week moving averages.
The beta merchants will usually stop their work here.
Source: Optuma
NYSE Advance/Decline Line and New Lows
Since we are the furthest thing from beta merchants, we look under the hood. And when we do, we begin to see early signs of corrosion.
Think of it like an old car with a fresh paint job. It looks great sitting on the lot, but when you pop the hood...
...the NYSE Advance/Decline Line has moved aggressively lower over the past few weeks. At the same time, we have seen an expansion in new lows.
This is not what you would expect to see from a market consolidating just below record highs.
Source: Optuma
The Bonds
When we look at the bond market, we see weakness across both investment-grade corporates and Treasuries. These trends have been in place all year as the bond market repeatedly told the Fed, "You better hike."
Last week, it was nice to see the Fed finally listen.
Source: Optuma
Dow Jones Transportation Average and Utility Average
Looking at key pockets of the equity market, we can see that intermarket themes are weakening as well.
The Dow Jones Transportation Average remains below its 27-week moving average.
The Dow Jones Utility Average, which we do not discuss often but is an important part of our work, has broken down in what appears to be the completion of a topping pattern.
Source: Optuma
Seasonality
All the above plays out in what is, on average, the worst month of the year for the broader market.
Source: Optuma
Final Thoughts
A strong bullish trend in the market is one that is healthy, based on breadth, and is confirmed, based on intermarket themes. The current bullish trend for equity prices does not meet those criteria.
When you pop the hood on this market, we see an engine that is beginning to stall. Does that mean the bull market is over? No. The major averages are still moving forward, but they are doing so with less participation and less confirmation than we would like to see.
