If you were looking for a reason to be cautious about the financial markets, then last week’s action in stocks offered you one giant yellow light. The selling in domestic stocks nearly across the board pushed the major U.S. averages below their 50-day moving averages last week, a first salvo in what could well be a wider sell-off.
Now, the breaking of the 50-day average does not mean that this current bull market is over, or that U.S. stocks now are headed into a downward spiral. The price action on Monday certainly was a positive for the bulls; however, what I do think is important is to view last week’s big selling as an early warning for the markets at large.
Take a look at the charts here of the price action during the past 12 months (through 4/14). As you can see, stocks in the SPDR S&P 500 (SPY) recently fell below the 50-day average, as did stocks in the PowerShares QQQ Trust (QQQ).
I do think the breakdown in the domestic equities last week does require you to take a look at how much equity exposure and risk you have in your portfolio.
Now, one thing to keep in mind is that every significant market pullback during the past 15 months actually has been a buying opportunity. If recent historical trends continue, then the yellow warning light we saw last week also may be a buy signal. However, I do suspect that the characteristics of this current pullback should make even the most ardent bulls a little worried.
Characteristics such as a very sharp slide off of their recent highs in market-leading segments such as biotech, semiconductors and other widely held stocks all could be a very bearish harbinger of things to come.
Then we have the action at the Federal Reserve, with the central bank basically sticking to its “taper” guns and withdrawing the monetary stimulus candy by $10 billion per month. Finally, market leadership is shifting from growth to value, and even to Treasury bonds, yet another indicator of a change in the current market milieu.
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