Last week we outlined seven major fundamental headwinds against continued economic growth. Now the technical position of the market has worsened as well, reinforcing our view that stocks have probably peaked.
The S&P 500 peaked intra-day at 1344 on February 13th, and recently failed to reach or exceed this level. It then rolled over, creating a classic double top that could well end the two-year cyclical bull market. In addition the market has developed a few other negative patterns. It has tended to rise on lower volume and drop on higher volume. On a daily basis stocks have exhibited generally higher openings and weaker closings. Average daily upside volume has been declining while downside volume has been on the rise. Various measures of bullish sentiment have reached high levels often seen at previous market peaks. A number of the momentum darlings that have led the market have either stopped making new highs or have declined sharply.
The market’s technical deterioration is fully in gear with the negative fundamental factors we outlined last week. These were the imminent ending of QE2, the move to tighten fiscal policy, soaring commodity prices, the Mid-East turmoil, financial problems in the peripheral EU nations, China’s efforts to slow their economic growth and the negative economic ramifications of the Japanese earthquake.
In addition there are now a few tentative signs that growth may be slowing down. Ward’s has reduced its estimate of second quarter vehicle production from plus 40% (quarter-to-quarter) to minus 2% as a result of Japanese supply chain problems. The amount of exports and imports at the key Long Beach port declined in March. While the one week sharp rise of initial unemployment claims does not make a trend, it is noteworthy that even on a four-week moving average, claims are higher than they were six weeks ago.
The small business index is still at recessionary levels and the latest report shows a drop in hiring. While nominal retail sales were up in March, they were probably down slightly when adjusted for inflation. Core PPI prices have moved up while wages are still stagnant, meaning that real income is probably down, a negative indicator for real consumer spending in the period ahead. Lumber prices have declined sharply while steel production has ticked down. While mortgage foreclosures have declined as a result of the robo-signing mess, they are due to pick up again soon and could extend into next year. The percentage of upward earnings revisions has peaked and started to move down.
In sum, it seems to us that both the fundamental and technical aspects of the market are now in gear and that stocks are now in a topping formation with a major downside move in sight.