How a Fractured Stock Market Tells You What's Next

Volatility has certainly picked up in the stock market, and most mainstream pundits are blaming the new tariffs that the U.S. will impose on China (CNBC, Aug. 2):

Stocks fall on trade war fears, sending the S&P 500 to its worst week of 2019

But, let’s go back to Monday, July 29 — before those new tariffs were announced. The main stock indexes closed mixed, with the DJIA slightly higher, and the S&P 500 and NASDAQ slightly lower. The volatility had yet to kick in.

Plus, remember that it was as recently as July 16 that the DJIA had hit a new record high of 27,398.60.

With that as the backdrop, on July 29, our U.S. Short Term Update pointed out one reason why the broad market might soon be in for a rocky time:

The S&P 500 has already rallied to two new highs since the Dow reached its July 16 extreme, [yet] multiple Intermediate-term non-confirmations signal a fractured market advance… The vaunted FAANG stocks–Facebook, Apple, Amazon, Netflix and Alphabet’s Google–are diverging relative to the S&P and Dow.

The chart shows the NYSE FANG+ index, an equal-dollar weighted index consisting of the aforementioned stocks, the supposed leaders of the bull market. The index topped in June 2018, made a lower high in April 2019 and a still-lower high this month.

Our subscribers know: a fractured market is not a healthy market — hence, it’s usually a sign that trouble is afoot for the main indexes.

And that is exactly what happened.

After slightly lower closes for all the three main indexes on July 30, the DJIA dived 334 points on July 31. That was followed by a negative 281-point close on Aug. 1. Stocks were in the red again on Aug. 2, and even more on August 5.

Read More Here...

Bookmark the permalink.