So, this is how it ends. The powerful market uptrend that has seen the S&P 500 gain nearly 30% since September is collapsing under the weight of inflation concerns, a slowdown in Chinese economic growth, and political turmoil in North Africa and the Middle East.
There are new concerns that rising food and fuel prices -- both here at home and overseas -- will translate into reduced earnings growth and smaller profit margins. And of course, there is the risk that sticker shock will damage still-fragile consumer confidence. I've written frequently about these topics over the last two months -- which you can check out on my article index here.
Everywhere I look, there is evidence that Wall Street traders don't consider this a temporary blip; instead, they are preparing for the worst.
The most important thing has been the degradation in the measures of the supply and demand for stocks, or market breadth. In the wake of last week's harsh decline on February 22 there just wasn't been a big increase in the demand for stocks -- something we would expect if this was a bottom stocks were preparing to rally out of. Looking at the components of the S&P 500 index, the selloff on February 22 pulled down nearly 94% of all issues on more than 94% of total volume. Total volume totaled more than 4.3 billion shares.
During Monday's advance, only 66% of the stock moved higher on total volume of just 3.2 billion shares. The intensity just wasn't there. You can see this in the way former high-flyers in the materials and financial sectors just barely managed to climb off their lows before being pummeled again today. And you can also see it in the way U.S. Treasury Bonds continue to perk up despite the rebound in equities -- something I talked about in my last blog post.
Another thing that caught my eye is the extent by which cyclical stocks are outperforming defensive stocks in the healthcare, utilities, and consumer staples sectors. That's not a characteristic of a healthy uptrend; but instead suggests that whatever buying demand we're been seeing is focused on the types of stocks that outperform when the economy and the stock market are weakening.
That chart above illustrates this by showing the relative strength of the Morgan Stanley Cyclicals Index vs. the NYSE Composite Index. When the line rises, cyclical stocks in sectors like materials and energy are outperforming the overall market. This is seen during uptrends. But that's not what's happening now.
You can see how cyclicals are underperforming by a magnitude not seen since last summer. And before that, you have to go all the way back to the summer of 2008 to get a similar period of underperformance. This suggests that the downtrend that's developing is significant.
It's worth noting that the short pullback we saw in November due to the Irish bailout didn't see a cyclical underperformance like we have now -- which in retrospect indicated the pullback would be quickly resolved and the uptrend would resume.
And finally, another way to see the change in sentiment is by looking at the flood of activity in equity put options, which is now pushing up the CBOE Equity Put-To-Call Ratio trendline at a pace not seen since May. And as you can see in the chart above, the nine-day moving average has broken up and out of the downtrend channel that has held the measure for 10 month. This is a reflection of real money being put to work to protect positions against downside risk as well as make speculative bets that stocks are headed lower.
For investors, the best advice is to pull capital out of equities and park them in cash or Treasury bonds for now -- which is one of the few asset classes that is showing any real strength. The ProShares Ultra 20+ Year Treasury (UBT) is worth a look. For the risk takers out there, I like shorts in the materials and financial sectors including Patriot Coal (PCX) and Banco Santander (STD).
Disclosure: Anthony does not own or control a position in any of the companies or funds mentioned. He has recommended positions in UBT, PCX, and STD to his newsletter subscribers.
Be sure to check out Anthony's new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up.
The author can be contacted at anthony@edgeletter.com. Feel free to comment below.
Copyright © 2011 Microsoft. All rights reserved.
Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.
Fundamental company data and historical chart data provided by Thomson Reuters (click for restrictions). Real-time quotes provided by BATS Exchange. Real-time index quotes and delayed quotes supplied by Interactive Data Real-Time Services. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Gradient Analytics. IPO data provided by Hoover's Inc. Index membership data provided by SIX Telekurs.
Japanese stock price data provided by Nomura Research Institute Ltd.; quotes delayed 20 minutes. Canadian fund data provided by CANNEX Financial Exchanges Ltd.
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
[BRIEFING.COM] A spike in oil prices amid percolating geopolitical tension in the Middle East prompted participants to pare their positions. Their steady selling effort left stocks to settle at session lows with sharp losses. ... More
American shares succumb to selling pressure as it becomes clear the U.S. economy isn't immune to rising food and fuel prices.
xx
From blighted to bling: 10 revitalized neighborhoods
Read Full Article »