Momentum Slipping or Healthy Consolidation?

Posted On August 28, 2017 2:36 pm

Beneath the surface of the indices hanging near all-time highs the stock market has seen some decent rotation. The question is whether this is a sign momentum is slipping and the market is ready to roll over, or is this a healthy consolidation building up for a new bullish leg higher?

The basic fundamentals would seem to support the bullish case as earnings remain strong, interests are still historically low and valuations for most stocks are not excessive.

But some of the charts and technical readings suggest the market is becoming increasingly vulnerable to a pull back. Remember the S&P 500 Index has now gone a record 19 months without a 5% decline. Such pullbacks usually occur 3-4 times every 52-week period.

Probably the most illustrative signal of losing momentum is that steep increase in the number of issues that have dropped below their 200 dma. As of Friday’s close a full 50% of the S&P was below their 200 dma, the highest level since January of 2016.

Other breadth indicators also continue to slip, such as the new low list has expanded and the Value Line Geometric Average index has moved from all-time high to flat for the year in the space of just a few weeks.

The number of stocks making new lows has moved to its highest level since early 2016, although it does remain relatively minimal. Perhaps of more concern was the failure of the new high list to expand in July as the indexes were making new highs.

Investor sentiment has also tempered of late. After evidence of extreme optimism, investors are shifting away from equities. While a “wall of worry” can be a positive for the market, the current mentality seems to be one of after years of good gains; maybe it’s time to take some money off the table. This could be a headwind for stocks.

The market is still in an uptrend but you can see the momentum and NAAIM starting to roll over

Longer-term support for the S&P 500 first builds in the 2350-2375 range. A break below 2420 would continue this pattern, while a move above 2460 would suggest it has run its course.

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.