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Bearish warning signs are flashing in the markets, but that doesn't mean U.S. stocks are in a bear market or even that one will develop.
"I'm not one to call for a bull market or a bear market, but we're in a bearish environment. It's easier for stocks to come in under pressure here," says Brian Shannon, founder of AlphaTrends.net.
Shannon breaks down how he reads the market to look for signals. "I don't look for a top in the market," he says. "I listen for the message of the market on a daily basis and see how that fits together in the weekly time frame, the monthly time frame."
Many of the current warning signals began surfacing toward the beginning of March. "[I]t started to become a little bit more difficult to make money on the long side with just about anything. And then what we started to notice was that there were a lot less, actual official swing trading ideas... [T]hey were coming from groups that we don't normally consider growth-type names — names like Heinz (KHC), Weight Watchers (WW), blue chip-type names. And then... we started getting stopped out of our longs."
JC Parets, founder of allstarcharts.com, has also been documenting the increasingly "messy" market and defensive posture.
"When Consumer Staples bottomed out on March 1st relative to the rest of the market, that was one of the first signs of defensive rotation. At the time, we chalked it up as just one signal, of many that we monitor. But as the month has progressed, the soldiers continue to fall. Aussie/Yen has rolled over and we're even getting a bid in US Treasury Bonds," writes Parets.
The 10-year yield (^TNX) recently surged to 1.75%, a level not seen since January 2020. This reflected expectations for a successful reopening of the global economy and coincided with stocks in the value and cyclical sectors outperforming. Meanwhile, growth tech and momentum names that were the stars of 2020 took a back seat. Tellingly, the Dow Jones Industrial Average (^DJI) surged to fresh all-time highs thanks to a boost from names like Walgreens Boots (WBA), Caterpillar (CAT), Boeing (BA), JPMorgan (JPM), Goldman Sachs (GS), Dow Inc. (DOW) and Chevron (CVX). But the Nasdaq Composite (^IXIC) failed to notch a record, falling short by 5%.
None of this is to say risk markets are set to crash or that it's time to short everything.
Parets says, "As long as US Financials are above those 2007 highs, it’s tough to make a structurally bearish case. The weight-of-the-evidence suggests this is just a messy environment within a larger more macro advance for stocks."