Major Stock Indexes Flash Sell Signals

Major U.S. stock indexes and their related exchange traded funds (ETFs) flash new “sell” signals.
May’s volatile stock market action has generated point and figure “sell” signals in all major U.S. indexes with the exception of the Nasdaq.

On My Wall Street Radar

chart courtesy of StockCharts.com

In the chart of the S&P 500 (NYSEARCA:SPY) above, we can see how the index generated a “sell” signal on May 8th with a “triple bottom breakdown” which is a significant break of previous support and points to the likelihood of lower prices ahead.

Concurrent with the new signal, the new down side price objective is 1280, some 5% from here. This level also closely coincides with the next significant level of support at 1290.

The Dow Jones Industrial Average (NYSEARCA:DIA) is also on a point and figure “sell” signal with a down side price objective of 12,150 which is 670 points or approximately 5% from Friday’s closing prices.

The Russell 2000 Index of small cap stocks (NYSEARCA:IWM) generated a point and figure “sell” signal on May 2nd, which is to be expected as small cap stocks typically are market leaders both on the way up and the way down, and its down side price objective is approximately 7% from today’s level.

The only major stock index still on a point and figure “buy” signal is the Nasdaq Composite and its Nasdaq 100 component (NYSEARCA:QQQ) so we’re starting to see weakness across most major indexes. Regarding the Nasdaq, an interesting side note is that Apple Computer, the Nasdaq heavyweight, is on a point and figure sell signal with a down side price objective of $505.

The Economic View From 35,000 Feet
Good news last week came from Friday’s University of Michigan Confidence Index which rose in May to 77.8, beating forecasts. The nation’s small businesses also reported rising confidence as the NFIB Index rose in April and job openings for the month also recorded a gain.

Import prices declined, along with the producer price index, and Chinese inflation rates also moderated.

The bad news came mostly from Europe with the political chaos in Greece as the country was unable to form a new government and the country’s stock market dropped more than 10%. Francoise Hollande won the French Presidential election which could be good or bad news depending upon your outlook; however, for Europe it likely means more stress and uncertainty as Mr. Hollande faces off against Chancellor Merkel over their plans to resolve the financial crisis in Europe. The two are scheduled to meet this week which is likely to be the first of many possibly contentious meetings ahead.

Spanish bond yields spiked dangerously close to the “unsustainable” 7% level, with the 10 year closing above 6%, and credit default swaps spiked to 498, eclipsing the previous record of 493 as investors grow more concerned that the country will need a bailout sooner rather than later as its bond yields continue to climb and its banks are under ever growing stress. Bankia, the country’s third largest lender overall and largest real estate lender, was nationalized on May 9th and could need more than $6 billion in recapitalization.

Banks were making news at home, as well, as J.P. Morgan shocked markets with a $2 billion trading loss and was promptly downgraded by Fitch Ratings agency along with a quick 9% haircut on U.S. stock exchanges.

Markets took a step backwards last week with the Dow Jones Industrial Average (NYSEARCA:DIA) dropping 1.7%, the S&P 500 (NYSEARCA:SPY) declining 1.2% and the Nasdaq (NYSEARCA:QQQ) dropping 0.8%. The Russell 2000 (NYSEARCA:IWM) finished the week mostly flat. Gold and oil finished at new year to date lows.

Next week will bring retail sales, Empire State Index and home builders on Tuesday, housing, industrial production on Wednesday, leading indicators and Philadelphia Fed on Thursday so we’ll get plenty of news about the future outlook for the U.S. economy.

Other important indicators will be European GDP reported on Tuesday which will offer a glimpse into recession on the Continent. Most importantly, we’ll see the FOMC meeting minutes on Wednesday which investors and analysts will slice and dice for insights into Dr. Bernanke’s plans going forward. Operation Twist is due to expire in June, and as been the case since the onset of the financial crisis, everyone is depending upon the Federal Reserve to ride to the rescue and save the day yet again.

Bottom line: Fundamental and technical indicators point to weakness and risk ahead as we head for the summer doldrums.

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Disclaimer: Wall Street Sector Selector trades a wide variety of ETFs and positions can change at anytime.

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