Wednesday’s market selloff caused an inordinate number of stocks to appear on my nightly bearish scan.
But the thing that stood out to me more than anything was the fact that the exchange-traded funds for all four of the main U.S. indexes were on the bearish list – the SPDR Dow Jones Industrial Average ETF Trust (NYSEArca: DIA), iShares Russell 2000 ETF (NYSEArca: IWM), PowerShares QQQ Trust (NASDAQ: QQQ) and the SPDR S&P 500 ETF (NYSEArca: SPY).
While I looked at the charts for all four ETFs, it was the daily chart of the SPY ETF that stood out the most. If we look at the daily chart, we see that every daily close since April 7 has been between $206.50 and $212.50. That is range of less than 3% over the course of the last 11 weeks.
We see how the daily stochastic readings just made a bearish crossover, which would seem to indicate that the SPY fund is headed back down to the low end of the range. If it does head back down, it will be interesting to see whether those two lows earlier in June end up providing support or not.
The lows came on June 9, at $206.68, and on June 15, at $206.78. This could actually be a test of the bull market if the SPY were to pull back and drop below the $206.50 level.
Turning our attention to the weekly chart, we see the tight range over the last few months, but I also looked at the past two Julys, as we are close to entering the month. Notice how in the last week of July over the last two years, the SPY saw pretty decent selloffs. Could we possibly be setting up for another one?
One other item of note about the weekly chart stems from the 52-week moving average. The SPY ETF has not closed out a week below that moving average since December 2011. That is 3 ½ years without closing below the 52-week moving average. That just goes to show how steady the bull run has been.
With that being said, there have been a few recent news items that have me a little concerned. Let me start by saying that in addition to writing for Wyatt Research, I also write for an alternative investment site where the focus is on hedge funds and liquid alternative mutual funds. Because of this, I am particularly in tune with the alternative investment space.
In the last few weeks there have been four different news items that caught my attention.
First, there was an article in The Wall Street Journal regarding pension funds. and how they regretted being so heavily invested in hedge funds over the last few years.
Then there was an article in Bloomberg about how liquid alternatives are not drawing in as much money from individual investors this year.
The third item was an interview in The New York Times with noted short seller Bill Ackman, in which he stated that that he would “have to think very, very hard before another public short.” He added, “It’s not worth the brain damage.”
As a contrarian, when I see three stories like this in a short period of time, it makes me think that we may be seeing a top in the market. When investors don’t see the need for hedged investments or bearish investments, that seems like an over-the-top bullish stance and it makes me nervous.
While I am not ready to switch to an all-out bearish stance on the market at this time, I would encourage readers to take note of these developments and take some action to protect their portfolios. You can buy an inverse ETF to serve as a hedge for the rest of the portfolio, or you can buy some long-term put options on one of the index ETFs listed above.
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