The S&P Looks Ready to Test the Floor

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The S&P 500 dropped over 1.5% yesterday on increasing volume. The average has come within 10 points of the 1450 resistance level, where I have said in recent columns that the run from March was likely to stall.

You can now see that the index, after it briefly broke above the 200 a moving average, and then reversed over the past couple days, is close to short-term support. After the sharp correction we had this week, it is likely that there will be some type of bounce higher to begin test the 200-day moving average. However, this is still likely that this is just a rally within a primary downtrend.

If the 1350-to-1375 support level does not hold over the near term, there is a high probability that we can take out the March lows before it really be put in a solid bottom.

S&P 500

Click here for larger image.

Source: TC2000

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The Smart Money

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Source: Sentimentrader.com

When the market is reaching overbought levels, I keep a close eye on the Smart Money Index, which shows what the institutional investors are doing as the market moves up, compared with the average individual investor. You can see from the chart below that during the recent run, institutions have not been supporting the move while the same time individuals have been becoming extremely bullish.

We saw the same type of action last October, when institutions started stepping away from the market while individual investors continued to bid it up. The concern is if these institutions begin to hit the sell buttons to lock in profits, current support levels could be quickly breached. Since the institutions control about 70% of the market, you don't want to be on the opposite side of their trades.

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Banking

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Source: TC2000

You can see from the chart below that the banking index began breaking down a couple weeks ago and has recently broken below the short-term uptrend that started in March. It is very unusual for the market to continue to head higher as the financial sector declines.

If this banking index does not hold the 675 level, it could be an early warning that we could see more problems in this sector.

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Investors may be moving out of the banking sector, but they sure have taken a liking to technology stocks. That in turn has pushed many of the stocks into sharp uptrends and many have become leaders in the market. The problem is that the move may have been a case of a little too much, a little too fast. In fact, the technology sector has taken over as the largest weighting in the S&P 500, making up a little over 16% of the index.

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Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.