foxex: Red Flags for the S&P 500’s Bullish Run?

Chart Advisor | Focus on the Price

By John Jagerson, CFA, CMT

Friday, June 21, 2019

1. Is there Enough Fuel to Keep the Bullish Fire Burning?

2. S&P 500 Stalls Near All-Time Highs

3. Why isn't the VIX Lower?

Major Moves

We all remember what happened after the S&P 500 reached a new all-time high on May 1st, right?

It consolidated for a few days and then went on to complete a head-and-shoulders bearish reversal pattern.

Knowing that, nobody would blame you if you were to skeptically sit back and ask, "Is it going to be any different this time?" In fact, I'm a little nervous myself that the market may be toying with us again, only to dash our bullish dreams with another pullback, or at least an extended consolidation.

One of the reasons I'm nervous is one of my favorite market-breadth indicators is getting over-extended, and every time it has reached this level during the past two years, the S&P 500 has pulled back.

The market-breadth indicator I'm talking about is the Percentage of S&P 500 Stocks Above Their 200-day Simple Moving Average (SMA).

As you have probably already guessed from the name, this indicator shows the percentage of stocks that make up the S&P 500 that are trading above, or at, their respective 200-day SMAs.

This information is helpful because the 200-day SMA is the industry standard for determining the long-term trend of a stock – enabling stock traders to eliminate a lot of the volatility that distorts the market each day.

When a stock is trading above its 200-day SMA, it typically indicates the stock is experiencing longer-term bullish momentum.

Similarly, when a stock is trading below its 200-day SMA, it indicates the stock is enduring longer-term bearish momentum.

Currently, the Percentage of S&P 500 Stocks Above Their 200-day Simple Moving Average (SMA) is at 68.25. Since February 2018, every time the indicator has climbed to this level (71%), it has turned around and started moving lower.

These turnarounds have preceded each of the declines in the S&P 500 during that same time span.

While the market-breadth indicator has not turned about yet, I will be watching it closely as it tests resistance at 71%. If it can break through, watch for the S&P 500's bullish up-trend to continue. If resistance holds, watch for the S&P 500 to drop back down into its consolidation range.

S&P 500

The S&P 500 pushed momentarily higher to a new all-time intra-day high of 2,964.15, but it wasn't able to hold onto the gains. By the time the closing bell rang, the index had dropped back below yesterday's close.

Granted, it wasn't a large pullback. The S&P 500 only lost 0.13% on the day.

That means traders weren't dumping their shares in a desperate attempt to take profits off the table. But they weren't pouring additional cash into the market to snap up more shares either.

Instead, everybody seemed content to hold steady into the weekend and see what happens next week with the Organization of Petroleum Exporting Countries (OPEC) meetings, the Durable Goods Orders and Personal Consumption Expenditures (PCE) Price Index announcements and the G20 Meetings.

It's going to be a busy week.

Read more:

Measuring Global Stock Market Breadth

9 Favorite Stocks In An Uncertain Market

8 Quality Stocks That Can Thrive In A Volatile Market

Risk Indicators - VIX

The CBOE Volatility Index (VIX) is currently waving a red flag. It's not a doomsday flag, or anything that serious, but it is a red flag we should be paying attention to.

You see, typically when the S&P 500 establishes higher highs, the VIX will follow suit and start establishing lower lows. The pattern usually plays out this way because the S&P 500 and the VIX have an inverse relationship. When one goes down, the other tends to go up.

However, while the S&P 500 has been forming higher highs – when you compare the high the index reached in late-April and early-May and the new all-time high it just set – the VIX has been forming higher lows, not lower lows.

Analysts refer to this pattern as a bearish divergence because it often proceeds a bearish pullback of the S&P 500.

When traders stop buying as many put options on the S&P 500 because they are confident enough that the index is going to move higher, the VIX drops.

So when I see the VIX remain elevated, even when the S&P 500 is moving higher, it tells me that traders are buying protective puts on the S&P 500 at the same time they are loading up their portfolios with equities. They want the bullish equity exposure, but they want some downside protection for their portfolios, just in case.

Read more:

How to Use a VIX ETF in Your Portfolio

The VIX: Using the "Uncertainty Index" for Profit and Hedging

Using Moving Averages to Trade the VIX

Bottom Line - Red Flags

We looked at two concerning indicators for the S&P 500's future today: the Percentage of S&P 500 Stocks Above Their 200-day Simple Moving Average (SMA) and the VIX.

Neither one of these indicators has confirmed a bearish turnaround, but they are both waving red flags we should be paying attention to.

Let's see what next week brings.

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