Tracking the three signs of a bear | a cautious investor

It is undeniable that the underlying trend for the S&P 500 remains strong through the end of the second quarter of 2024. But what about the “internal” conditions of the major benchmarks? Today we will highlight three “bearish signs” we are looking for. Two of them may have already triggered, and we’ll let you know what kind of confirmation could indicate a bearish reversal heading into the summer.

The first thing I notice about major market tops is that we tend to observe bearish momentum divergences spreading. As the price rises, momentum readings using indicators such as RSI begin to weaken. Let’s take a look at what the recent rise in the S&P 500 has looked like from a momentum perspective.

Here we can see that the RSI for the S&P 500 was around 70 when it first closed above 5300 in mid-May, but was only around 65 during the recent rise above 5350. In weak momentum, higher highs indicate less emphasis on buyers and potentially burnout. It is in its most recent uptrend.

This isn’t just about the S&P 500. For a similar example from mid-May, check out the daily chart of Amazon.com (AMZN).

We can also see a bearish momentum differential in industrial sector stocks such as Eaton Corp. (ETN) of Northeast Ohio.

I would say next week is very important for the S&P 500, but to see if we can get another 5350 breakout with stronger momentum, overall the June uptrend is indicated by lower momentum numbers.

These “bear tracks” are all part of a larger list of what I call. My Market Top Checklist, would be very useful right now! Want to follow along as we track each item on our checklist to gauge potential market highs in the summer? you are Market Misbehavior Premium Member! Don’t forget to use the code stock chart Get 20% off for your first 12 months!

Another sign of weakness I would argue is the lack of confirmation in market breadth indicators. Below is a chart of the S&P 500 as of the close along with the cumulative advance/decline lines for the New York Stock Exchange, S&P 500 large caps, S&P 400 mid caps, and S&P 600 small caps.

Not only have all four advance-bearer lines declined over the past three weeks, but three of them have closed below their 50-day moving averages this week. When the market rises but broad conditions fail to confirm new highs, this signals narrow leadership and potential upside conditions.

I know what you’re thinking. “But Dave, isn’t that just because Magnificent 7 stock is in control again?” And yes, you would be right. And while our major benchmarks can indeed move higher on the back of large-cap growth stocks, market history shows that healthy bull market phases tend to be marked by improving broader numbers. If we observed more stocks participating in an upward trend, we would be much more optimistic about market conditions!

Now we come to the third sign of weakness, where the “line in the sand” of the major averages is broken. If you go back to the S&P 500 daily chart, do you see the pink trend line using the major lows since October 2023?

If we connect the October 2023 low with the mid-April low near 4950, we can see that the trend line connects almost perfectly with the subsequent lows in April and May. As long as the S&P 500 stays above this trend line, the main bullish trend will largely remain intact. However, if SPX fails to hold this trend line and perhaps the price and moving average support breaks near 5200, I would strongly consider planning for a further decline in the risk asset.

During an established bull market phase, foolish investors tend to only think about potential upside because they believe the bull market will never end. Cautious investors know that looking for signs of a potential cycle will allow them to better protect previous gains in the event of a downward correction!

RR#6,

dave

P.s Are you ready to upgrade your investment process? Check out our free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.

The author had no positions in any securities mentioned at the time of publication. All opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.