Buyer Beware: Stocks May Be Signaling More Weakness to Come

Buyer Beware: Stocks May Be Signaling More Weakness to Come image Stocks May Be Signaling More WeaknessStocks May Be Signaling More WeaknessThere are growing whispers a market correction is on the horizon. Guess what: it’s already happening, and it could worsen to the point that we see a major decline, based on my technical analysis.

Over the past five sessions to April 18, some profit-taking has emerged, which is what I was expecting and hoping for. My technical analysis was that the previous rate of the advance was not sustainable.

And as expected, the higher-risk assets, including small-cap and technology stocks, are being dumped in favor of blue chips and S&P 500 stocks.

Just take a look at the chart of the S&P 500. The index is facing tough resistance to move higher and could retrench lower if a sustained upside break is not achievable, based on my technical analysis.

The blue ovals on the chart below also suggest a possible retrenchment in the coming months due to the seasonal effect that stocks deliver the best results from November to April, according to the Stock Trader’s Almanac.

If this also turns out to be the case this year, you will need to be careful and plan for this. In other words, look at taking some profits off the table or using put options as a hedge.

Buyer Beware: Stocks May Be Signaling More Weakness to Come image SPX SP 500 large Cap Index stock market chart$SPX S&P 500 large Cap Index stock market chart

Chart courtesy of www.StockCharts.com

A look at the higher risk shows carnage. The Russell 2000 is down a whopping 5.3% in April, while the NASDAQ has contracted by 3.1%. The Dow is holding tight, down just 0.3%.

My technical analysis indicates that while investors have predominately been bullish since the start of the year, investor sentiment is pausing with neutral readings in four straight sessions on both the NYSE and the NASDAQ. Previously, we saw bullish signs in all but five sessions since the start of 2013, based on my technical analysis.

The reason why I mention investor sentiment is its obvious impact on the stock market. In the following chart, note how the S&P 500 declines when investor sentiment weakens, as my technical analysis suggests. The major declines are indicated by the blue ovals on the chart below. We are not talking about a few sessions, but a lengthier trend of multiple weeks and months.

At this juncture, there is no evidence that investor sentiment is reversing, but you need to watch this. Seeing multiple weeks of negative sentiment would be a sign to sell, according to my technical analysis.

Buyer Beware: Stocks May Be Signaling More Weakness to Come image NYHL NYSE New Highs New Lows stock chart$NYHL NYSE New Highs New Lows stock chart

Chart courtesy of www.StockCharts.com

The way I see it is a market correction is needed and is healthy.

My feeling is that the stock market risk remains vulnerable to the downside, based on the charts, my technical analysis, the fundamental side regarding global slowing, and what I’m seeing as slow sales and concerns by major global companies. (Read “Caution: Market’s Strength Is False.”)

While there are some who say this is a great buying opportunity, I would rather err on the conservative side, and I advise taking slow and cautious steps.

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