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TheStreet Open House

Stock Market: Technical Indicators Are Flashing Red

Stocks in this article: EEM EFA EPP

By Michael Arold

May 2013 was a month that investors might mark in their calendars: around that time, US interest rates started to rise sharply. Since then, the 10-year yield moved from 1.7 percent to 2.8 percent. That’s a 60 percent increase.

In May, most global equity markets started to turn south as well: Emerging markets, represented by the iShares MSCI Emerging Markets ETF (EEM), Asian and European stocks such as the iShares MSCI Pacific ex-Japan (EPP) and iShares MSCI EAFE (EFA) peaked.

US equities, however, have so far ignored the rise in interest rates. Granted, technical cracks emerged, but US stocks are still trending up. Regarding equities, America is the “last man standing.” Yet, I would be cautious.

Although the S&P 500 Index (SPX) declined around five percent in recent weeks, sentiment is still too optimistic: normally, there should be much more trading going on in equity put options. The “put/call ratio” traded on average around 0.6 during the last days of August. That’s a low number, compared to earlier pullbacks.

More and more US sectors have been acting extremely weak. Take housing for example. The earliest victim of the current interest rate environment. There are still a few strong stocks out there and I’m long in some of them.

However, leaders decline last and I will close long positions quickly since this is not a strong market. When momentum stocks fall out of favor, they can fall really hard.

Is Syria really the trigger for this? I don’t think so. If Mr. Market wants to go down, he will go down and find a reason to justify the move. There has been weakness before Syria: market breadth, the number of companies advancing relative to those declining, decreased while the S&P marked new highs at the beginning of August.

I’m a trader and I usually do not hope for certain developments to take place. Hope is not a business model. But these days, I actually hope that we have not seen the highs of 2013: retail investors just started to get back into the markets and after the Financial Crisis, they shouldn’t get hurt so soon again. On the other hand, that’s how markets have often worked: the small guy was the last one to buy.

The investments discussed are held in client accounts as of August 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Michael Arold

Michael Arold

I am a technical trader and an aerospace engineer with more than 15 years of investing and trading experience. My

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