The technical picture for the U.S. stock market just keeps getting worse.
Consumer discretionary stocks have become the fifth of the 10 broad market sectors to generate a bearish signal from the Reality Shares Advisors' Guard Indicator, solidifying a negative technical trend for the overall market. The Guard Score reflects how far each sector is from bear market territory and contributes to the Guard Indicator for the overall market, measured through a combination of price and volatility trends to gauge the market's direction. The Guard Score for the consumer discretionary sector has been moving lower for eight months, and the recent market turbulence accelerated the deterioration of its technical factors.
Specifically, the discretionary sector's volatility levels surpassed long-term averages by the market close on Jan. 25, and the short-term moving-average price trend for this sector fell below its long-term average on Feb. 3. Sector stalwarts such as Amazon and McDonald's have delivered strong returns over the past year (as of Feb. 3), but they have received no help from names such as Whirlpool, Wynn Resorts and Chipotle Mexican Grill, which have performed poorly during this time.
Source: Reality Shares Research
The Guard Indicator is fairly new, but we have back-tested it using historical market data and found that right now is only the third time in the last 15 years when it would have triggered a negative warning for the stock market.
Before now, the most recent negative period would have started on Jan. 10, 2008, just before the financial crisis, and lasted through July 14, 2009. During that period, the S&P 500 fell 34%. Before that, the Guard would have been negative beginning Sept. 15, 1999, and would have remained bearish for all but three trading days until May 22, 2003, which would have avoided a decline of 20.9% in the S&P 500 in the wake of the bursting of the dot-com bubble.
Despite the Guard alert, it may not be time to discount the entire consumer discretionary sector. Fundamentals for the sector as a whole remain strong, and the average DIVCON Score for the sector, which uses fundamental measures to calculate corporate dividend health, indicates discretionary sector companies will continue to grow their dividends (average DIVCON Rating of 3.7 as of Dec. 31, 2015).
Source: Reality Shares Research
With half of the 10 broad market sectors indicating a negative technical trend, this reinforces a bearish trend in the broader stock market that was first signaled by the Reality Shares Advisors Guard Indicator on Sep. 16, 2015, when consumer staples became the third sector to pass into negative territory, joining energy and utilities. The S&P 500 has fallen 4.1% since then and has exhibited consistent volatility (as of Feb. 3, 2016). On Sep. 30, 2015, health care became the fourth sector to turn negative, receiving a nudge when a tweet about "price gouging" in prescription drugs by presidential candidate Hillary Clinton sent pharmaceutical shares lower.
Looking at the current picture, five of the 10 sectors are within 1% of moving between bullish and bearish territory and could shift within the next few days (as of Feb. 3, 2016). The financials sector continues to retain the strongest Guard Score, although it has been trending downward for several months, and the energy sector continues to maintain the lowest Guard Score. If more sectors turn negative, it could indicate an even longer or more severe decline in the broad market.
The Guard Indicator is a tool that systematically assesses the direction of the market based on a combination of momentum and volatility factors. The process first measures the health of each of the 10 broad market sectors individually using those factors, and once our research tells us three or more of the sectors are negative, a bearish technical trend is signaled for the overall market.