NEW YORK- Indicators that investors use to gauge the health of the US stock market have taken a turn for the worse, fueling worries that the benchmark index may revisit its mid-June bear market low.
The S&P 500 is down 7 percent since mid-August following a sharp summer rally, battered by expectations that the Federal Reserve will raise rates higher than previously anticipated in its fight to bring down consumer prices from their 40-year highs.
The retreat in stocks has given more reason for caution to those who track market phenomena such as breadth, momentum and trading patterns to inform their investment decisions. While many of these indicators were painting an optimistic picture just a few weeks ago, they tell a less bullish story now, raising worries that this year’s selloff in markets may not be over.
“I had to downgrade the market technically, given how severe the decline has been over the last three weeks,” said John Kolovos, chief technical strategist at Macro Risk Advisors.
“The odds of a market bottom being struck back in June have diminished to that of just slightly better than a flip of a coin at this juncture.”
Among the factors investors study is market breadth, which shows whether a significant amount of stocks are rising or falling in unison. Positive market breadth, when more stocks are advancing than declining, points to a high degree of confidence among stock bulls.
Recently, market breadth has started to send worrying signals. The percentage of stocks trading above their 50-day moving average in the Russell 3000 .RUA has fallen to about 30 percent, from around 86 percent in mid-August.
“We want to see this indicator stabilize where it is right around now,” Kolovos said. “We really don’t want to see it get much lower than 25 percent.”
Meanwhile, the 15-day moving average of the percentage of S&P 500 stocks hitting fresh three-month lows – another measure of stock market breadth – has climbed to about 10 percent from just above zero in mid-August, according to data from Thrasher Analytics. It stood at around 60 percent during the market low in June.
“We’re watching if we continue to see an expansion in bearish breadth,” said Andrew Thrasher, the firm’s founder. “If we see expanding new lows that will put downside pressure on the index.”
Additionally, the S&P 500 Index has lingered below its 200-day moving average for five months now, the longest such streak since May 2009.
Historically, the index has returned -3.56 percent in September when it is below the 200-day moving average during a year in which the United States holds midterm elections, as it will in 2022, according to BofA Global Research. The index is up around 1 percent month-to-date.
